Bonus share and stock split are two commonly implemented corporate actions (an event that affects the shareholders) by companies to increase the number of shares traded. The key difference between bonus share and stock split is that while bonus shares are offered without a consideration (free of charge) to the existing shareholders, stock split is referred to as dividing company’s shares into multiple ones to improve affordability.
CONTENTS
1. Overview and Key Difference
2. What is Bonus Share
3. What is Stock Split
4. Side by Side Comparison – Bonus Share vs Stock Split
5. Summary
What are Bonus Shares?
Bonus Shares are also referred to as ‘scrip shares’ and are distributed through a bonus issue. These shares are issued to the existing shareholders free of charge according to the proportion of their shareholding.
E.g. For every 4 shares held, the investors will be entitled to receive 1 Bonus share
Bonus shares are issued as an alternative to dividend payments. For instance, if the company make a net loss in a financial year, there will be no funds available to pay dividends. This may lead to dissatisfaction among shareholders; thus, to compensate for the inability to pay dividends, bonus shares may be offered. Shareholders can sell the bonus shares to meet their income needs.
Advantages and Disadvantages of Bonus Shares
Advantages
- Companies with short term cash deficits can issue bonus shares instead of cash dividends to shareholders.
- Issuing bonus shares improves the perception of company’s size by increasing the issued share capital of the company.
Disadvantages
- It is not a meaningful alternative to cash dividends for shareholders as selling the bonus shares to generate income would lower their percentage stake in the company.
- As bonus shares increase the issued share capital of the company without any cash consideration to the company, it could cause a decline in the dividends per share in the future which may not be liked by shareholders.
- Bonus issue does not generate cash for the company.
What is Stock Split?
Stock Split is an exercise where the company divides the existing shares into multiple shares. As a result, the outstanding number of shares increase; however, there will be no change in the total value of shares since the Split does not have a monetary value.
E.g. If the company currently has a total market value of $3billion (30 million shares trading at $100) and the company decides to implement a Stock Split based on 3 for 1 basis. Following the Split, the number of shares will increase to 60 million. This results in a reduction of the share price to $50 per share. However, in overall, there is no change in the total market value of $3 billion
The main advantage of stock split is the ability to facilitate improved liquidity of shares. Following a stock split, shares are more affordable to the investors due to the reduced share price. Normally, companies split stocks when the share price is on the rise. However, an overly aggressive split may lead to risks if the share price falls too much in the future. A decision for a stock split may be taken by the board of directors or by the vote of shareholders; thus, this can be a time-consuming and costly exercise.
The opposite of stock split is referred to as a ‘Reverse Stock Split’ where the existing number of shares are been merged to reduce the number of outstanding shares.
What is the difference between Bonus Share and Stock Split?
Bonus Shares vs Stock Split |
|
| Bonus Shares are offered without a consideration (free of charge) to the existing shareholders. | Stock Split is referred to as dividing company’s shares into multiple ones increasing affordability. |
| Shareholders | |
| Bonus Shares are only available to the existing shareholders. | Both existing shareholders and potential investors can benefit from the stock split. |
| Receipt of Cash | |
| Bonus Shares do not result in cash receipt. | Stock Split result in cash receipt. |
Summary – Bonus Shares vs Stock Split
Both bonus shares and stock split result in a reduction in price per share and an increase in the total number of shares outstanding. The main difference between bonus share and stock split depends on whether or not cash consideration is received. These two options should not be exercised frequently as the resulting reduction in share prices may have a negative impact in the future.
Reference:
1.”Bonus Shares Issue.” Accounting for Bonus Shares Issue. N.p., n.d. Web. 02 Mar. 2017.
2.”Scrip, Bonus & Capitalisation Issues.” Scrip, Bonus & Capitalisation Issues – TIMETOTRADE. N.p., n.d. Web. 02 Mar. 2017.
3.”Definition of ‘Stock Split\’” The Economic Times. N.p., n.d. Web. 02 Mar. 2017.
4.Picardo, CFA Elvis. “Reverse Stock Split.” Investopedia. N.p., 27 Nov. 2013. Web. 02 Mar. 2017.
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1. “1730089” (Public Domain) via Pixabay