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Often, we see company announcements for a bonus issue or a stock split. They look the same, especially to small investors, who do not understand the nitty gritty of finance. Both, the bonus issue and stock split increases the number of shares held by the investors. Although they appear to be same, there is a fundamental difference between the two.
Bonus issue
When a company management decides to issue bonus shares, it results in the increase of the company's share capital. This increase in share capital is funded by the company's Reserves and Surplus (retained earnings in the balance sheet). For example, suppose a company issued one lakh equity shares of face value of Rs 10, the company's share capital is Rs 10 lakhs. Now, if the company wants to give a one-for-one bonus (1:1) to its shareholders, it has to generate another one lakh shares and transfer Rs 10 lakhs from its reserves and surplus account to share capital account.
Thus, the bonus is like 100 percent dividends as far as the company's reserve and surplus is concerned. A bonus issue permanently increases the share capital of the company, and hence, implies that the company has to service the enlarged equity capital in line with future market expectations. Bonus is treated as a company reward to the existing equity investors of the company. A bonus issue reflects the management's confidence in the future and gives a very strong signal in the market.
Stock split
The concept of stock split came into the limelight a few years ago when electronic holdings of stocks started in the demat format. Historically, the face value of shares used to be Rs 10 (usually) or Rs 100 (for some stocks). The prime reason was to maintain uniformity and avoid confusion and manual errors. With the adoption of the demat system, it became much easier to have and trade shares with multiple face value denominations. However, as per the regulations, the face value should be in multiples of Re 1.
Usually, a company's management thinks of stock split when they want to increase the liquidity of shares in the market. When the market price of shares goes up quite a bit, it is difficult for the investors to buy even small quantity of shares in the market. The company may decide to split the share's face value to increase the liquidity of shares, and hence a drop in price. When a share is split, say, from Rs 10 face value to Re 1 face value, there would be no impact on the company's share capital. The company's share capital and reserves remain unchanged.
However, the total number of shares increases. For example, if a company issued one lakh shares of face value of Rs 10 each, the company's share capital is Rs 10 lakhs. Now, if the company split the face value to Re 1 per share, the total number of shares will be multiplied by 10 (that is, 10 lakh shares) but the paid up capital will still remain Rs 10 lakhs.
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What is the Difference between bonus share and share split?
Bonus shares is a form of divendends paid in shares while stock split is when the price of a stock goes too high and the company wants to lower the price of the stock. However, some companies do not split their stock. For example, Berkshire Hathaway.
What is the difference between Bonus Shares and Shares split?
in case of bonus shares the value of the share decreases proportionate to the number of bonus shares issued. for eg: if company issues bonus shares in ratio of 1:1 and the price of share is 900 , then after bonus issue, the corresponding value of the share gets Rs. 450.genreally company issue this in place of giving dividends.the market captalisation doesnt get affected. as if shares doubles the prices is halved. whereas in split shares the face value of share decreases. generally the face value of share is 10 Rs. but face value can be high. eg: if face value is 100 Rs. then company can split d share in ratio of 100:10. ..now the person holding 100 shares of rs 100 now will hold 1000 shares of 10 Rs each. now shares can be traded more frequently and this will in turn increase the liquidity of the share
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What does a two-for-one stock split mean to shareholders?
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What is the Difference between bonus share and share split?
Bonus shares is a form of divendends paid in shares while stock split is when the price of a stock goes too high and the company wants to lower the price of the stock. However, some companies do not split their stock. For example, Berkshire Hathaway.
What is the difference between Bonus Shares and Shares split?
in case of bonus shares the value of the share decreases proportionate to the number of bonus shares issued. for eg: if company issues bonus shares in ratio of 1:1 and the price of share is 900 , then after bonus issue, the corresponding value of the share gets Rs. 450.genreally company issue this in place of giving dividends.the market captalisation doesnt get affected. as if shares doubles the prices is halved. whereas in split shares the face value of share decreases. generally the face value of share is 10 Rs. but face value can be high. eg: if face value is 100 Rs. then company can split d share in ratio of 100:10. ..now the person holding 100 shares of rs 100 now will hold 1000 shares of 10 Rs each. now shares can be traded more frequently and this will in turn increase the liquidity of the share
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