Bonus and stock split are two well known corporate actions undertaken by the publicly listed companies to boost the number of shares traded. There is often confusion among the investors between the two. Learning about the stock market with our course on ELearnmarkets will help us to understand these corporate actions. So, let us know why companies take this kind of corporate actions and its effect on shareholders.
What is Bonus Issue?
Bonus Issue also known as capitalization issue, offers additional shares to the existing shareholders without any cost. Companies with low cash balance may issue bonus share rather than cash dividend as a method of providing regular income to its shareholders. There is just an extra financial impact as shares are funded via reserves.
Issuing bonus shares increases the number of shares which leads to decrease in the stock price of the company in proportion to the bonus ratio, which makes the stock attractive for retail investors who hesitate to invest in companies that are fundamentally strong but are available at higher rate.
Price per share, Earnings per share (EPS) or, book value per share (BVPS) falls as the number of shares goes up. A bonus issue is taken positively as a sign of good health of the company. When bonus share are issued the price of the shares fall proportionately but the company value remains the same.
For example; In 2018 Infosys Ltd. declared 1:1 bonus, pre bonus no. of outstanding shares were 2,184,127,091 with face value 5/share, post-bonus no. of shares were 4,368,254,182 with face value 5/share. Issuing bonus is same like making a narrow slice of a cake. The total size of the cake does not change by how many times you cut it.
What is Stock Split?
Stock split is the action taken in which a company divides its existing shares into multiple shares to boost liquidity of shares. Split is usually taken when the stock price is high, making it pricey for investors to acquire. It brings down the share price since number of share increases but the value of the stocks remains the same. The only thing that gets divided is the face value. The primary motive is to make share affordable to retail investors.
For example; In 2018, Britannia Industries split their stocks in the ratio of 1:2, which means every 100 shares held by existing shareholders will have 200 shares. It split the share with the face value of Rs. 2/share to Re. 1/share. Pre-split shares were 25 crores shares of face value Rs.2, post-split it was 50 crores equity shares of face value Re.1 each.
Difference between Bonus issue & Stock Split
A bonus issue is an additional share given to existing shareholders while stock split is same share divided into two or more as per the split ratio. Bonus shares are benefited to existing shareholders while both existing shareholders and potential investors can benefit from stock split.
In bonus and stock split, fundamentals of the company is not going to change, the issued share capital remains the same, the revenue remains the same, and the profit remains the same too, only thing which will be effected is the face value and reserves capital.
If the company goes for a stock split from the face value of 10 to the face value of 5. The number of stocks will get double and the price will get adjusted, whereas in bonus face value remains the same but the price will get adjusted in proportion to bonus ratio.
Bonus issue and stock split are used primarily by companies that have seen their share prices rise substantially and although the number of outstanding shares increases and price per share falls, the market capitalization (and the value of the company) does not change. As a result, bonus issue and stock splits help make shares more affordable to small investors and provides greater marketability and liquidity in the market.