At a glance: Concept of stock bonus issue and split
Stock bonus issue and split are two of the ways in which companies reward their investors in the form of additional shares.
Let’s know about these concepts in detail.
Stock bonus issue:
A stock bonus issue implies that an investor receives additional shares to the extent of the specified proportion. The additional shares are allotted without any consideration, that is, free of cost.
In this scenario, the share price of the stock will get divided as per the proportion of bonus stocks issued.
For example, if a company initially had 100 shares worth Rs 600 each. A bonus issue in the ratio of 2:1 is announced. This means that for every one share held by an investor, he will receive 2 shares. This brings the company’s share count to 300 shares.
So now, the price per share will be:
600 (initial price per share) * 100(initial number of shares)/300 (number of shares post bonus issue) = Rs 200
A bonus issue signals the ability to service a larger equity base as compared to a stock split. It is preferred by companies as an alternative to giving out dividends. It also enhances the liquidity of shares, thereby increasing the participation of investors and traders.
Stock split:
In a stock split, existing shares of a company are split in a specified proportion. The number of shares held by an investor is increased to the extent of a split ratio. However, there is neither any monetary consideration required from the investors nor an increase in the authorized share capital.
In this situation, the share price of the stock will get divided as per the ratio of share split. For instance, a company had 100 shares worth Rs 800 each. A stock split in the ratio 1:4 is announced. This means that every single share of the company will now be split into 4 shares. This brings the company’s share count to 400 shares.
So now, the price per share will be:
800 (initial price per share) * 100(initial number of shares)/ 400 (number of shares post stock split) = Rs 200
It should be noted that, in a stock split, just like the market price of the share, the face value of the share also gets split as per the specified ratio. So, in the above example, if the face value per share was Rs 10, it will now be Rs 2.5 (10/4) per share.
Additionally, a stock split enhances the liquidity of stocks as a reduction in the share price enables the investors to buy or sell stocks more easily.