7 Points Comparison – Bonus Share Vs Stock Split
4 min readThis article will do a comparative analysis of Bonus Shares and Stock Split. There is always a lot of confusion among investors regarding the difference between bonus and split, as both result in an increase in no. of stocks and a decrease in share price.
We have discussed bonus share vs stock split in detail in our earlier articles.
Difference Between Stock Split and Bonus
If you’re wondering how you can differentiate between bonus issue and stock split, the following are the main difference between split and bonus.
1. Meaning
- Bonus share is a free additional share for the shareholder. Giving bonus shares is a way of distributing the corporation’s earnings to the shareholders, not given out in dividends but converted into free shares. The capital is transferred from the retained earnings account to the paid-up capital account, so the total shareholder’s equity remains unchanged.
- The stock split is the same stock split into more shares. Stock split is just splitting stock and does not involve any change in the balance sheet; just the number of shares will increase.
2. Example
- Bonus Share: If a shareholder holds 100 shares of a company and declares a 4:1 bonus, he gets 4 shares for free for everyone he holds. That is a total of 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.
3. Objective
- Bonus Share: To distribute the company’s accumulated earnings to the shareholders without paying dividends, but in free shares. So, the company can use the cash for expansion projects. To improve the creditworthiness, thereby credit rating of the company. Thus, a bonus share is issued to maintain and nurture the company’s brand value.
- Stock Split: To increase stock affordability for small retail investors, resulting in an increased investor base. To enhance the liquidity of the stock in the market.
4. Face Value
- In the case of a bonus issue, there is no change in the stock’s face value.
- In the case of a 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 the case of the Bonus share issue, the share capital increases, but the reserves get reduced proportionately. So, the balance-sheet statement of the company changes accordingly.
- While in the case of a stock split, the share capital and reserves remain the same. Instead, the number of shares is doubled, and the stock’s par value 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 and potential investors can benefit from the stock split.
7. Impacts
Let’s compare the impact of these events from the market perspective.
- Bonus issue will make the shares more affordable, but the bonus issue is more of a confidence statement, indirectly indicating continued better prospects.
- On the other hand, a stock split will only make the shares more affordable for retail shareholders, and there could be some marginal effect on the demand for shares in the future.
Impact on Future Dividends
- Generally, the company’s dividend outgo increases because of the bonus issue vs stock split. Because the dividend is always declared at face value. As we have seen in the above points, the face value of the share doesn’t change in case of a bonus share issue. So the shareholders get the additional dividend on each bonus share received.
- While, in the case of a stock split, the face value of the share decreases according to the split ratio. As a result, whenever the company announces a dividend in the future post-split, the dividend will 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 the 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 the tax treatment of the gains in both cases.
- In the case of the bonus issue, the new shares are received for zero, so calculating the capital gains will affect the tax treatment (whether each lot is treated as a short-term or long-term gain.
- While in the case of stock splits, the stock price gets halved, so the cost-basis of the gain/loss will also get halved.