Bonus Shares Vs Stock Splits: How do they compare?
Did you know that in 2020, Apple’s market value surpassed Rs 164,000,000 Crore? This is double the market capitalization of the 30 share index and more than the total market capitalization of the BSE 500 companies. Since then, the value of Apple’s shares has doubled.
What Are Bonus Shares?
Bonus shares are additional or extra shares distributed by a firm to current shareholders in proportion to the number of shares they presently own. The shareholders receive bonus shares at no further expense. This is also known as profit capitalization since it is paid from the company’s earnings or reserves. Bonus shares are not taxed on their own. Investors don’t need to pay tax on bonus shares received. They will, however, have to pay capital gains tax if they sell those bonus shares for a profit.
Why Does a Company Issue Bonus Shares?
Sometimes, even though a company’s profits are good for the quarter, it may not be able to pay dividend to its shareholders. In such cases, instead of paying dividends, the company issues bonus shares to its existing shareholders. Companies, on the other hand, often issue bonus shares even when they have plenty of cash. Certain companies employ this tactic to avoid the significant dividend distribution tax, which must be paid when dividends are declared. To meet liquidity demands, shareholders can sell their shares on the secondary market, at which point they may be subject to capital gains tax.
Also Read: What is Bonus Share?
A bonus issue is evidence that the business is operating effectively and efficiently. If the company couldn’t guarantee future earnings and dividend payments from the shares, it wouldn’t have issued bonus shares in the first place. Bonus shares promote corporate reputation, corporate image, and goodwill of the company.
What Is a Stock Split?
A stock split occurs when a company issues extra shares in order to boost the liquidity of its stock. It occurs when a company’s board of directors’ issue extra shares of stock to current shareholders without reducing the value of their shareholdings. A stock split decreases the individual value of each share while increasing the total number of shares outstanding. The firm’s overall market capitalization and the value of each shareholder’s stake remains the same. It will remain the same regardless of whether the number of shares outstanding increases or decreases. This is because the business is not technically issuing any new shares.
Why Does a Company Issue Stock Splits?
Sometimes a company’s stock price may be pretty high and not many investors would purchase high priced shares. Suppose that a company decides to implement a 2:1 stock split. Every shareholder would receive a share worth double what they already had. However, their individual shares will be valued 50% less than their initial value. But why would a firm do that? The major motive for this is to reduce the value of their shares.
You can see how a share of Rs. 100 is now worth Rs. 50, or a share worth Rs.10 is now worth Rs.5 following a 2:1 stock split. So, the stock price in this case has decreased by half. However, what effect does lowering the stock price have? Most investors would rather purchase 100 shares of Rs. 500 stocks than one share for Rs. 5000. This is a comfortable range for the overwhelming majority of investors.
As a result, a stock split would help a firm attract more investors and increase the liquidity of its share trading. Increasing the liquidity of a stock makes trading easier for both buyers and sellers. Businesses will be able to repurchase their shares for less money than they did earlier due to this.
Bonus Shares Vs. Stock Split – How Do They Compare?
If we went into comparing bonus shares with stock split. The first thing to note is how bonus shares are additional shares that are distributed by a company to its shareholders when the company is unable to pay dividends to its shareholders.
Stock split, on the other hand, are additional shares issued by a company in the form of stock split to its current shareholders with the motive to increase the liquidity of the stock and to reduce the stock price. Bonus shares and stock splits are both given free of charge to shareholders. There is no change in the face value of bonus shares. However, the face value of stock split reduces in the same ratio.
