Among the known corporate actions, Bonus issues and Stock Splits are two measures companies undertake to boost the number of shares. In both cases, the number of shares with the shareholders will be enhanced without paying any extra amount. However, the objectives of both concepts are different, and here we are to let you know the difference.
What is a Bonus Issue?
Bonus Issue, also known as Capitalization Issue, offers additional shares to the existing shareholders without cost. Companies with a profitable turnover use this method to reward their shareholders. They are issued out of the reserves of the company.
Bonus shares are distributed in proportion to an investor’s shareholdings. For instance, when a firm offers 5:1 bonus shares, it means that the shareholder will receive one bonus share for every five shares held in your Demat account ( as of the record date). So, if you hold 100 shares of that firm, you will receive 20 bonus shares.
To illustrate the effect on the shares of an existing shareholder of a company, let us assume a bonus issue of different ratios – 1:5, 1:1 and 5:1
| Before Bonus Issue | After Bonus Issue |
| Bonus Issue | No. of shares held | Share Price | Face Value | Value of Investment | No. of shares held | Share Price | Face Value | Value of Investment |
| 5:1 | 100 | 10 | 10 | 1000 | 120 | 8.333 | 10 | 1000 |
| 1:1 | 100 | 100 | 10 | 10000 | 200 | 50 | 10 | 10000 |
| 1:5 | 2000 | 20 | 10 | 40000 | 12000 | 3.33 | 10 | 40000 |
By issuing bonus shares, the number of outstanding shares increases with a proportional decrease in the value of each share, ensuring no change in the market capitalization, as shown in the table above. However, the face value of the shares remains unchanged.
Many companies see bonus issues as a viable alternative to dividends. Bonus issues are payments made to shareholders from a company’s net reserves, while dividends are paid from net profits. Dividends are paid to shareholders in cash, credited to your registered bank account, while bonus issues are paid in additional shares. As a result, it increases the value of its stock, making it more enticing to investors.
What is a Stock Split?
A Stock Split is an action taken in which a company divides its existing shares into multiple shares to boost the liquidity of shares. Split is usually undertaken when the stock price is high, making it pricey for investors to acquire. It brings down the share price as the number of shares increases. The firm’s market cap and the value of each shareholder’s investment stay unchanged after a stock split.
Like Bonus Issues, the price gets decreased by the ratio. To illustrate,
| Before Split | After Split |
| split | No. of shares held | Share Price | Face Value | Value of Investment | No. of shares held | Share Price | Face Value | Value of Investment |
| 1:2 | 10 | 900 | 10 | 9000 | 20 | 450 | 5 | 9000 |
| 1:5 | 10 | 900 | 10 | 9000 | 50 | 180 | 2 | 9000 |
However, the face value of the share changes with the stock split. If the face value of a stock is Rs 10, and the stock is split in the ratio 1:2, the face value of the stock after the stock split becomes Rs 5.
Differences between Bonus Issue and Stock Split
Both methods are ways a company can use to reward its shareholders. In stock splits and bonus issues, shareholders don’t have to pay anything extra.
In a stock split, existing shares get split. The liquidity in the number of shares increases, and the price of each share decreases, but the total investment does not get impacted due to the stock split.
| Bonus Issue | Stock Split | |
| Meaning | Bonus issue is extra shares given to shareholders free of cost. | Stock Split divides the existing outstanding shares of the company into multiple shares. |
| Share Capital and Reserves | Share capital increases but Reserves decrease | No change |
| Face Value | No change | Reduces in the same ratio |
| Company Rationale | An alternative to dividend and giving away accumulated reserves | To increase share liquidity, reduce share price and make it affordable for more shareholders. |
Both Bonus Issues and Stock Splits are effective ways to attract retail participation by increasing the number of shares and reducing the share prices. The existing shareholders, in both cases, will get to increase their shares without paying any extra amount. However, they differ in their rationale, affecting the company’s face value, reserves, and surplus, as seen above. Either Bonus Issue or Stock Split, the number of shares increases, and the share price decreases without change in the value of investment of existing shareholders and market capitalization of the company.
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