Bonus Shares and Stock Splits

Overview of Bonus Shares and Stock Splits
The bonus shares and stock splits are important parts of the dividend decisions of companies. The bonus shares and stock splits are essentially different from each other even though the basic idea behind issuing both of them is the same.

Overview of Bonus Shares
The bonus shares are issued by the companies from the following sources:
From the premium gathered from the sale of the stocks that were issued in the market
From the free reserves that are made up of the profits accrued by the company

  • Following are few characteristics of the bonus shares:
    The relative ownership of the shareholders does not change
    The book value of each share drops off
    The amount of income from a share diminishes

    There are certain reasons for releasing bonus shares:
    The release of bonus shares conveys the idea of economic stability of the particular firm.
    This helps in attracting more investors
    The bringing out of bonus shares always helps the companies to generate more funds

    Overview of Stock Splits
    In case of the stock splits the par value of the shares is decreased. The amount of shares to be issued is increased in proportion to the reduction in the value of the shares.

    Difference between Bonus Shares and Stock Splits
    The following table shows the differences between the bonus shares and the stock splits

    Stock Splits Bonus Shares
    The par value of the stocks deceases The par value of the stocks stays the same
    The reserves are not capitalized Only a certain amount of the reserves is used
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    Last Updated on : 27th June 2013

    The price of each share in the stock market fallsThe amount of shares issued goes upThe market price of each share becomes affordableThe number of undischarged shares goes up. This helps in active trading at the share marketThe particular business entity gains respect from the investors as a result of the increase in the base of share capital

 

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