Publicly-listed companies have a way to reward their shareholders in the form of dividends or extra shares. In this regard, bonus issues and stock splits are two such moves. The core idea is to make stock prices more affordable for investors.
A bonus issue or bonus share, also referred to as a capitalisation issue, is when existing shareholders get extra shares in a certain proportion without asking for extra charges from a company. The stock price in the bonus issue will get adjusted according to the bonus number of shares issued.
Generally, a bonus share is a positive sign of the company’s health. When these shares are issued, the price of stocks might take a dip but the creditworthiness of the company remains intact, though.
On the other hand, a stock split is when the number of shares gets multiplied. There is a split or divide in the number of shares held. However, no new shares are being issued by the company, only the existing number of shares are being divided or split. In a stock split as well, the share price gets halved in the ratio. The splitting of shares leads to a downward movement in the stock prices and raises the number of shares without affecting the value of the company. Ideally, the main objective of split shares is to make shares more affordable to retail investors.
While bonus shares prove beneficial for the existing shareholders, split stocks offer advantages to both existing and potential investors.
Both these moves prove to be quite beneficial for small and beginner investors as they allow them to buy more shares and rake in the benefits such as liquidity and marketability.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.