Bonus and stock split are two popular corporate activities initiated by publicly listed corporations to improve the shares traded. Investors usually get confused among these two words.
This article will help you know the variation among these corporate activities, why businesses take corporate action, and what impact the shareholders.
Capitalization issue is another word used for Bonus Issue, which grants more shares to the existing shareholders for free. Businesses with less cash balance may issue bonus shares instead of cash dividends as a process of giving regular income to their shareholders. There is just an additional financial influence as shares are backed through reserves.
Issuing bonus shares raises the number of shares which results in a drop in the stock value of the business in proportion to the bonus rate, which attracts retail investors who hang back to invest in firms that are essentially strong but are open at a higher rate.
Earnings per share (EPS), price per share or, book value per share (BVPS) drops as the quantity of shares increases. A bonus issue is perceived positively as a sign of better health of the business. When bonus shares have been announced, the shares drop proportionately, but the company value remains the same.
For instance; In 2018, Infosys Ltd. announced a 1:1 bonus, pre bonus no. of existing shares were 2,184,127,091 with a face value of 5/share, the post-bonus number of shares climbed to 4,368,254,182 with a face value of 5/share. Issuing a bonus is the same as cutting a small piece of a cake. The full size of the cake does not vary by how many times you miss it.
Stock Split is an action conducted in which a corporation cuts its current shares into more shares to improve the liquidity of shares. Split is generally considered when the stock value is high, causing it to be costly for investors to get. It draws down the share amount since the quantity of shares rises, but the stocks’ price remains as it is. Face value is the only thing that gets divided. The main motive is to make shares affordable to retail investors.
For instance; In 2018, Britannia Industries split their stocks in the proportion of 1:2, which indicates every 100 shares owned by existing shareholders will become 200 shares. It split the shares from the amount of Rs 2/share to Re 1/share. The quantity of pre-split shares was 25 crores of face value Rs 2, post-split it became 50 crores equity shares having face value of Re.1 each.
What is a Reverse Stock Split?
A reverse stock split is just the reverse of a stock split as it sounds. In this situation, the quantity of existing shares of the company decreases. This corporate activity will increase the value of the stock.
You may guess that a share value increase is beneficial for the company, but the reverse split is essentially an accounting method.
Here the market capitalization of the business stays the same. Fundamentally, the company scratches all outstanding shares and issues new shares in straight balance to what you had earlier.
For example, in a 1 is to 5 reverse splits, you will now have one share for every five shares you had. If you had 1,500 shares, for instance, then you will land at 300 shares.
Corporations usually perform reverse stock splits to limit the stock price from falling too much. It should not be viewed as a sign of progress, but it shows instability in its financials.
Bonus Issue VS Stock Split
A bonus issue is an extra share allotted to existing shareholders, while a stock split is the same share divided into more than two shares according to the split proportion. Bonus shares are profitable for current shareholders, while in a stock split, both existing shareholders and potential investors can get an advantage.
In stock split and bonus, fundamentals of the company will not affect, the given share capital stays the same, the revenue stays the same, and the earnings remain the same too, the only factor that will be influenced is the face value and reserves capital.
Suppose the company chooses a stock split from the face value of 10 to the dace value of 5. The number of stocks will become double, and the price will get settled, as in bonus face value stays as it is, but the price will get settled according to the bonus ratio.
Bonus issues and stock splits are corporate activities primarily initiated to limit share prices from growing too high. Reverse Stock splits are initiated to restrict the share price of a business from dropping too much. Though the number of existing shares raises and the cost per share falls, the market capitalization (and the value of the business) does not impact. Bonus issues and stock splits aid to make shares more under budget for small investors and gives higher marketability and liquidity in the market.
What is the motive of a stock split?
Intending to boost the liquidity of shares, the business takes up the stock split operation where current shares of the company are split into multiple shares.
How is stock splits beneficial for investors?
A stock split has a decrease in the share values, making it more affordable to investors for buying. Therefore, as a result, it raises the liquidity in the stock.
Why would a business decide to do a reverse stock split?
Businesses usually do a reverse stock split to prevent the share price from the dropdown. After implementing a reverse stock split quantity of existing shares reduces, which leads to a rise in the value of stocks.
What is the advantage of announcing bonus shares?
The main motive of announcing bonus shares is to capitalise on the loose reserves when there are no new investment opportunities for the corporation. It also raises the liquidity in the share as the number of shares increases.
Which businesses announce bonus shares?
Businesses that have huge reserves and no new road for investment announces bonus shares.