Difference between Bonus Shares and Stock Split: What are the pros and cons for both?

Difference between Bonus Shares Vs Stock Splits: Introduction

Bonus shares and stock split are two of the most common terms used by companies that are listed publicly. In fact, these are not just terms but the actions taken by these companies to give a boost to the number of traded shares. If you're confused between these two terms and want to know the difference between a bonus and split stocks, then keep reading. In this article, we'll not only discuss what is Bonus /Split share but will also tell you how they are relevant to the investors. Let's begin! 

What is Bonus Share?

Bonus share or bonus issue is also referred to as capitalization issue. It offers extra or simply bonus shares to the shareholders without asking for extra charges. Generally, companies that have low cash balances prefer issuing bonus shares instead of dividends to their shareholders as a way of providing them with a regular income. But what is the purpose of issuing bonus shares? Here is your answer! 

When a company issues bonus shares, it results in an increase in the number of shares, which in turn reduces the stock price with respect to the bonus ratio. This makes the stock more attractive in the eyes of investors who hesitate while investing in a company that is financially stable but has higher stock prices. 

In general, parameters like Earnings per share (EPS), Price per share, Book Value per share, etc. decrease with the increase in the number of shares. Generally, a bonus share is a positive indicator of the company's health. When these shares are issued, the price of stocks may fall but the value of the company remains the same. 

This was about the causes of bonus shares, now let's look at their pros and cons. 

Pros and Cons of Bonus Shares

Pros:

• Bonus shares tend to reduce the stock prices to a great extent. This is beneficial as the reduced stock prices attract more investors and thus increase the reach of stocks. This allows investors with low capital to invest in the company stocks without worrying about the price. 
• Bonus shares refer to profit capitalisation. This action increases the creditworthiness of the company and makes it more attractive in the stock market. 
• It offers more shares to the investors which increases the chances of good dividends in the future.
   

Cons:

• It changes the overall market sentiment which leads to more volatility in the stock prices. 
• Issuance of Bonus shares is a lengthy and time-consuming process that requires a plethora of permissions and regulatory approvals. 

This was all about the bonus shares meaning. Now let's see what split stocks are! 

What is a Stock Split?

A stock split is a process that involves a company dividing or splitting its existing shares into multiple shares in order to increase liquidity. This action is generally taken when the stock price is going very high, making it tough for the investors with low capital to invest in them. The splitting of shares brings down the stock prices and increases the number of shares without affecting the value of the company. Simply put, the main objective of split shares is to make shares more affordable to retail investors. 

Pros and Cons of a Stock Split

Pros:

• It reduces the stock prices so that any investor with a low budget can also purchase them. 
• It increases the number of traded shares, which in turn increases the ownership base. 

Cons:

• A stock split is an expensive and lengthy process. 
• It increases the volatility in the stock prices. 

Bonus Share Vs Stock Split 

• A bonus share is an extra share offered to the existing shareholders. On the other hand, a stock split involves dividing the existing share into multiple shares according to a split ratio.
• Bonus shares are beneficial for the existing shareholders. On the other hand, split stocks offer advantages to both existing and potential investors. 
• Whether it is a bonus share or a stock split, the fundamentals and value of the company do not change. Neither its revenue nor profits change. The only thing that changes is the face value of stocks and the reserve capital of the company. 

Bottom Line 

Stock splits and Bonus shares are actions taken by publicly listed companies in order to reduce their stock prices to make them more affordable for investors. Although both actions result in an increase in the number of shares, they do not affect the value or capitalisation of the company. These actions are very beneficial for small and beginner investors as they allow them to buy more shares and enjoy benefits like liquidity and marketability.