Difference Between Bonus Share & Stock Split
In this article, we are going to do a comparative analysis of Bonus Share Vs Stock Split. There is always a lot of confusion among investors regarding bonus shares and stock splits, as both results into an increase in no. of stocks and a decrease in share price.
Bonus Share Vs Stock Split Comparison
Following are the main differences between bonus share and stock split :
- Bonus share is a free additional share for the shareholder. Giving bonus shares is a way of distributing the corporate’s earning to the shareholders, not given out in the form of dividends but converted into free shares. The capital is simply being transferred from the retained earning account to paid up capital account, so the total shareholders equity remains same.
- Stock split is the same stock split into more shares. Stock split is just splitting of stock and do not involve any change in balance sheet, just the no of shares will increase.
- Bonus Share : If a shareholder holds 100 shares of a company and a company declares 4:1 bonus, that is he gets 4 shares for free, for every one share he holds. That is total 400 shares for free and his total holding will increase to 500 shares.
- Stock Split : A stock split of 1:10 means that a shareholder will have 10 shares for every single share he holds. The same single share held by the shareholder is divided into 10 smaller shares.
- Bonus Share : To distribute the company’s accumulated earnings to the shareholders without paying dividends, but in the form of free shares. So, the company can use the cash for expansion projects. To improve the creditworthiness, thereby credit rating of the company. Thus, bonus share is issued to maintain and nurture the brand value of the company.
- Stock Split : To increse the affordability of stock for the small retail investors which can result into the increased investor base. To enhance the liquidity of the stock in the market.
4. Face Value
- In case of bonus issue, there is no change in the face value of the stock.
- In case of stock split, the face value changes. For example, for the stock split of 1:10, the face value of Rs.10 for a stock will become Rs.1 after the split.
5. Share Capital & Reserves
- In case of Bonus share issue, the share capital increases but the reserves gets reduced proportionately. So, the balance-sheet statement of the company changes accordingly.
- While in the case of stock split, the share capital and reserves remains the same. Instead, the number of shares is doubled and the par value of the stock is halved. Thus, there is no change in the balance-sheet statement of the company.
6. Who Are Benefited?
- Bonus Shares are available only to the existing shareholders.
- Both existing shareholders as well as potential investors can be benefited from the stock split.
Lets compare the impact of these events from the market perspective.
- Bonus issue will make the shares more affordable, but bonus issue is more of a confidence statement by the company, indirectly indicating continued better prospects.
- On the otherhand, stock split will only make the shares more affordable for retail shareholders and there could be some marginal effect on the demand for shares going forward.
Impact on Future Dividends
- Generally, the company’s dividend outgo increases on account of bonus issue. Because the dividend is always declared on face value. As we have seen in the above points face value of share doesn’t change in case of bonus share issue. So the shareholders get the additional dividend on each bonus share received.
- While, in case of stock split, the face value of the share decreases according to the split ratio. As a result, whenever the company announces dividend in future post split, the dividend is going to be calculated as a decided % on the reduced face value of the share. The existing shareholders won’t get impacted due to it since even if face value of the share is decreased, the number of shares increases in the same ratio. so the total dividend received would be the same. But for the potential or new investors post split, the proportion of future dividends to be received would get affected adversely.
Tax Treatment on Gains on Bonus Share Vs Stock Split
- One major difference is in terms of the tax treatment of the gains in both the cases.
- In case of bonus issue, the new shares are received at price of zero, so when calculating the capital gains this will affect the tax treatment (whether each lot is treated as a short-term or long-term gain.
- While in case of stock splits, the stock price gets halved so the cost-basis of the gain/loss will also get halved.