What is the Difference Between Bonus Share and Stock Split?

The main difference between bonus shares and stock splits lies in their purpose, impact on share capital, and effect on the stock price. Here are the key differences:

1. Purpose: Bonus shares are issued to provide shareholders with additional shares as an alternative to dividends, while stock splits are carried out to reduce the stock price and make it more affordable for a larger group of investors.
2. Impact on Share Capital and Reserves: In a bonus issue, the total number of shares increases, leading to an increase in share capital and a proportionate reduction in reserves. In a stock split, the total number of shares remains unchanged, and the company's capital and reserves remain unaffected.
3. Stock Price: Bonus shares and stock splits both result in an increase in the number of shares outstanding, but their impact on the stock price is different. In a bonus issue, the stock price remains unchanged, while in a stock split, the stock price decreases proportionally.
4. Division of Shares: In a bonus issue, current shareholders receive additional shares for every share held, such as in a 4:1 bonus issue where they receive four shares for each one held. In a stock split, a single share is divided into multiple shares based on the split ratio, such as a 1:2 ratio where each share becomes two shares.
5. Face Value: The face value of a share remains the same in a bonus issue, while it changes proportionately in a stock split.

In summary, bonus shares are issued to distribute extra shares to shareholders as an alternative to dividends, while stock splits divide existing shares into multiple shares to make them more affordable for a wider range of investors. Both result in an increase in the number of shares outstanding, but their effects on share capital, reserves, and stock price are different.

Comparative Table: Bonus Share vs Stock Split

Here is a table highlighting the differences between bonus shares and stock splits:

Both bonus shares and stock splits increase the number of shares and decrease the share price without changing the overall value of investment for existing shareholders. However, they differ in their rationale, affecting the face value, and reserves and surplus of the company.