Understanding Corporate Actions: Bonus Shares vs Stock Splits

 Corporate actions play a crucial role in shaping an investor’s portfolio and influencing stock prices in the market. Among the most common corporate actions are bonus shares and stock split. Although both aim to improve liquidity and make shares more affordable for retail investors, their structure, purpose, and impact differ. This blog explains bonus shares and stock split in detail, helping investors clearly understand how each works and when companies choose one over the other.

What Are Corporate Actions?

Corporate actions are decisions taken by a company’s board of directors that directly affect shareholders. These actions may alter the number of shares outstanding, share price, or ownership structure. Common corporate actions include dividends, mergers, buybacks, bonus shares, and stock split.

Among these, Bonus shares and stock split are non-cash actions, meaning shareholders do not receive money but see changes in the number of shares they hold.

Understanding Bonus Shares

What Are Bonus Shares?

Bonus shares are additional shares issued by a company to its existing shareholders free of cost. They are distributed in a fixed ratio, such as 1:1 or 2:1, based on the number of shares already owned.

For example, if you own 100 shares and the company announces a 1:1 bonus issue, you will receive 100 additional shares, making your total holding 200 shares.

Why Do Companies Issue Bonus Shares?

Companies issue bonus shares for several strategic reasons:

• To reward loyal shareholders without using cash
  
  

• To capitalize on accumulated reserves
  
  

• To improve liquidity in the stock
  
  

• To signal confidence in long-term growth
  
  

Issuing bonus shares often reflects the company’s strong financial position and stable earnings.

Impact of Bonus Shares on Share Price

After a bonus issue, the share price adjusts proportionately. Although the number of shares increases, the total value of your investment remains the same immediately after the issue.

For instance, if a share priced at ₹400 announces a 1:1 bonus, the price may adjust to around ₹200, but the total investment value stays unchanged.

Understanding Stock Split

What Is a Stock Split?

A stock split occurs when a company divides its existing shares into multiple shares with a lower face value. Unlike bonus shares, no new capital is created; only the face value and number of shares change.

For example, in a 1:5 stock split, one share with a face value of ₹10 becomes five shares with a face value of ₹2 each.

Why Do Companies Opt for a Stock Split?

Companies announce a stock split primarily to:

• Reduce high share prices
  
  

• Make the stock affordable for small investors
  
  

• Increase trading volumes and liquidity
  
  

• Enhance market participation
  
  

A stock split is often seen when a company’s share price has risen significantly over time.

Impact of Stock Split on Share Price

Similar to bonus shares, a stock split does not change the total market capitalization of the company. The share price reduces proportionally to the split ratio, while the investor’s overall investment value remains the same.

Bonus Shares and Stock Split: Key Differences

Basis of Difference

Bonus Shares involve issuing new shares from reserves, while a stock split only divides existing shares into smaller units.

Effect on Share Capital

Bonus shares increase the paid-up share capital of the company. In contrast, a stock split does not change the total paid-up capital.

Face Value Change

In bonus shares, the face value remains unchanged. In a stock split, the face value of shares is reduced.

Accounting Treatment

Bonus shares require adjustments in reserves and surplus, whereas stock splits are simpler and mainly involve changes in share denomination.

Which Is Better: Bonus Shares or Stock Split?

From an investor’s perspective, neither bonus shares nor stock split directly creates instant wealth. Both actions are value-neutral in the short term. However, they can influence market sentiment positively.

• Bonus shares often signal financial strength and long-term confidence.
  
  

• Stock splits usually aim to increase affordability and trading activity.
  
  

Long-term investors should focus on company fundamentals rather than choosing between bonus shares and stock split.

Tax Implications of Bonus Shares and Stock Split

Both bonus shares and stock split do not attract immediate tax at the time of issuance. However, taxation applies when shares are sold:

• For bonus shares, the acquisition cost is considered zero.
  
  

• For stock split shares, the original purchase cost is adjusted according to the split ratio.
  
  

Holding period calculations also differ slightly, so investors should maintain proper records.

Know more visit here: https://quantirum.com/corporate-actions-explained-bonus-issues-and-stock-splits/

Conclusion

Understanding bonus shares and stock split is essential for making informed investment decisions. While both corporate actions increase the number of shares held and improve liquidity, their underlying purpose and accounting treatment differ. Bonus shares reflect a company’s accumulated strength, while stock splits focus on affordability and market participation.

Instead of reacting only to announcements, investors should evaluate the company’s fundamentals, growth prospects, and long-term vision. When used strategically, both bonus shares and stock split can enhance shareholder confidence and support sustainable market growth.