Investors are sometimes slightly confused in bonus issue and split of shares. This article below tries to explain what the two corporate actions means and how they will affect the company’s price.
Bonus Issue
A bonus issue, also known as an equity dividend, occurs when companies distribute more equity to their equity holders without payment (money). In accordance with their ownership of the corporation, shareholders receive these equities at no further cost. equity of the bonus is declared in a specific ratio.
Imagine a corporation alerting you to a 1:5 bonus issue. For every five shares you own, you are entitled to get an extra share of the company. Your investment’s worth, however, stays the same.
Company uses its free reserves from actual profits to give bonuses.
*Note – Companies are prohibited from issuing bonus stocks if they fall behind on principal and interest payment.
In order to boost liquidity, companies sometime issue bonus shares. For many small investors, a stock price hike that is too steep makes it pricey. Giving away bonus shares raises the quantity of shares in circulation and lowers the price, making it more affordable to small retail investors. Because it compensates equity holder by converting their cash into shares, the issuance of bonus equity also boosts investor trust in the company. The value of the equity is changed to reflect post-issue capital while the post-issue market cap stays the same.
Pros of Bonus Issue
- Upon obtaining the bonus shares, the investor is not required to pay any taxes.
- It is especially helpful to investors who wish to grow its investment in the company because they believe in its long-term prospects.
- Investor confidence in the company’s operations is increased through the issuance of additional shares and the use of cash for business expansion.
- Due to the company’s previous practice of issuing a stock dividend, the investor will benefit more if it decides to start paying cash dividends in the future because he owns more company shares.
Cons of Bonus Issue
- Some investors may want liquidity to achieve other goals; they may not all be interested in obtaining the stocks as a dividend. Such investors’ ownership position in the company decreases when they sale their bonus shares to generate liquidity.
- The share price must decrease proportionately to maintain the same level of market capital for the company; therefore, the stock dividend doesn’t provide the shareholders with any more money.
Stock Split
Companies raise the number of shares in circulation while lowering the price per share by splitting their stock. In other words, investors receive huge profits as the stock price of a company rises. The stock split is used when the stock ultimately reaches a price that prevents new investors from purchasing it.
A certain ratio is used by a company to determine how many new shares will be issued from each outstanding share when it splits its stock. As a result of the stock split, investors will get a quantity of shares that is equivalent to their current shareholding in the company.
stock splits can be a useful method for companies to increase liquidity and make their shares more affordable to individual investors. However, it is important to seek out stock market courses to gain a better understanding of the potential implications of such actions on the market
By enrolling in the best stock market courses in India, investors can gain the knowledge and skills necessary to trade confidently in the stock market and achieve their financial goals.
Pros of Split of Share
- It lowers the stock prices to make them more accessible to investors on a tight budget.
- It raises the volume of shares traded, which raises the ownership base.
Cons of Split of Shares
- A stock split is a time-consuming and expensive process.
- The price of stocks becomes more erratic as a result.
Difference Between Bonus Shares and Split of Equity
| Bonus Issue | Split of Shares | |
|
Meaning |
In a bonus issue, existing owners receive more shares in a certain ratio without paying any additional fees. to boost shares’ liquidity | The company splits its current shares into several shares. |
| Example | A shareholder who owns 1000 shares of a company and declares a 3:1 bonus receives 3 shares for free for each share held. His overall stake will rise into 4000 shares after receiving a total of 3000 shares for free. | If a company splits its stock at a ratio of 1:5 each shareholder would receive 100 share holding. The shareholder holds a single share that is divided into 5 shares. |
| Impact on Equity capital & Reserves. | When bonus shares are issued, the share capital rises while the reserves fall proportionately. | While the equity capital and reserves stay the same after a stock split, Instead, the stock’s par value is reduced to half and the amount of shares is doubled. |
| Face Value | Not Change | Reduction in face value in the same ratio |
| Beneficial | Existing Stockholders | Potential Investor and Existing Share holder |
Conclusion
While bonus issues can be a good thing for shareholders, it is important to understand the implications of such actions on the stock market. This is where a best stock market coaching can support you a lot. They provide individuals with the knowledge and skills needed to invest in the stock market confidently.
By receiving stock market coaching, investors can learn about the various factors that affect share prices, how to analyze company financial statements, and how to identify market trends. This knowledge can be very valuable when it comes to understanding the potential impact of bonus issues on a company’s share price and the broader market.
