Difference Between Bonus Share And Stock Split

What is a Stock Split?

Stock splits are actions where the face value of a share is divided further and the number of shares is multiplied by the same amount. A share split increases a company's number of shares by reducing the face value of the shares while maintaining its market capitalization, thus decreasing its face value.

Let’s consider an investor holding 100 shares of Rs.5 face value each and a share price of Rs.10. Following a 5:1 split, the investor will hold 100 x 5 =500 shares, each worth Rs.1 and worth Rs.2 each.

What is a Bonus Share?

Unlike the stock split, the stock bonus does not change the face value of the company's shares. Essentially, stock bonuses are tax-free dividends that are granted to existing shareholders of the company for free.

As part of the stock bonus, the company's reserves are deducted for the increase in its share capital as a result of the additional shares. It is a positive action for companies to issue bonus shares, but Sebi guidelines for the issue of bonus shares must be followed. Let's understand the difference between bonus and split.

Key Differences Between Stock Splits and Bonus Shares

The following are some of the key differences between a bonus and a stock split. And if you want to learn all technicals of the stock market, you can go for our stock market technical analysis course.

1.. Meaning:

In the stock split, shares are divided into multiple shares in a set ratio, while bonus shares are issued from company reserves to reward existing shareholders.

2.. Expressions in the Books

Stock split in the proportion of 5:1 or 3:2 with the right side being the original number. There is a left side showing the number of shares and a right side showing how these shares will be divided.

In addition to the original number of shares on the right side, the left side indicates the number of bonus shares received by Investors. Each shareholder with 2 shares will receive an additional share if there is a 1 for-2 ratio

This means that if someone has 10 shares then that person will get 5 bonus shares. For each two shares that a shareholder holds, he or she will be eligible for one bonus share, so a shareholder with 11 shares will also receive only 5 shares.

3.. Difference between Face Values

Splitting shares in a stock split means dividing existing shares in a set ratio (such as 5:1), while maintaining the same market capitalization. Due to the same factor as the share split, it results in a change in the face value of the shares.

As opposed to bonus shares, companies generate additional shares from reserve profits when they issue bonus shares since the face value of the share remains the same. This means that the bonus shares are issued as a dividend to existing shareholders in the form of bonus stock issuances that are also deducted from the reserves.

4.. Frequency of bonus and splits

Shares cannot be further divided when their face value reaches Rs.1 after a stock split. The face value of the stock is unaffected by stock bonuses, therefore, a company can do as many of them as they like.

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