When it comes to bonus shares vs stock splits, there are some key differences that investors should be aware of. Bonus shares and stock splits are two common ways companies use to adjust the number of outstanding shares, but there are distinct advantages and disadvantages to each.
In this blog post, we will explore what bonus shares and stock splits are, how they differ, and how they affect investors. With this information, you will be better equipped to make informed decisions about bonus shares vs stock splits.
What are bonus shares?
Bonus shares are extra shares that a company gives to its shareholders. These additional shares are generally issued in the ratio of existing shares held by the shareholder, meaning that if a shareholder owns 100 shares, they will receive an extra 100 bonus shares. Bonus shares are typically issued as part of a bonus issue and are distributed free of cost to the existing shareholders.
Companies may choose to issue bonus shares for a variety of reasons, including to reward long-term shareholders or to raise additional capital. The issuance of bonus shares can also have a positive effect on share prices, as more shares available typically increases demand and drives up the price.
What are stock splits?
Stock splits are a corporate action in which a company divides its existing shares into multiple shares. This can be done to make the shares more affordable, or to adjust the market capitalization of the company.
The split does not change the value of the company or its shareholders’ equity, but it does allow for smaller investors to purchase a larger number of shares at a lower cost.
In a stock split, each existing shareholder is given a certain number of additional shares proportional to the number of shares they held prior to the split. For example, if a company does a 2-for-1 split, each shareholder will receive two additional shares for every one share they own.
Stock splits do not always result in an increase in the share price. Instead, the value of the company remains the same and is divided among more shares.
This means that the stock price is adjusted accordingly. A 2-for-1 split would result in the share price being halved, while a 3-for-2 split would result in the share price being reduced by one third.
For companies that have experienced significant appreciation in their share prices, a stock split can be beneficial because it makes the stock more accessible to smaller investors who may not have been able to afford the higher price.
It also helps to boost liquidity, as there are now more shares available in the market. On the other hand, bonus shares are issued to shareholders without reducing the par value of the existing shares. These bonus shares are issued from the profits generated from a previous financial year.
They are issued in proportion to the existing holdings and credited directly to shareholders’ accounts. Therefore, bonus issues do not affect the company’s capital structure or earnings per share (EPS).
Instead, bonus issues act as free additional capital and hence increase the EPS of existing shareholders. Companies often use bonus issues as a reward for loyal shareholders; it is also used to retain or increase investor confidence in the company’s future prospects.
What are the benefits of each?
Bonus shares provide a way for companies to reward their existing shareholders without having to issue new shares or increasing the number of outstanding shares. This has the effect of increasing the value of the shareholder’s portfolio without necessarily increasing their total number of shares, which is beneficial for the long-term investor.
Bonus shares also allow a company to increase the amount of capital they have on hand, helping them to better finance their operations and investments.
Stock splits, on the other hand, are generally used to make a stock more accessible and appealing to investors. By splitting the shares into smaller denominations, it makes them more affordable and easier to buy, thus increasing liquidity in the market. It can also be used to reduce the overall share price and attract more investors.
Furthermore, stock splits can increase shareholder confidence by increasing their potential gains when the share price increases. This can help to boost investor morale and may result in further investment into the company.
Additionally, stock splits often act as a signal from management that the company expects its share price to rise. In general, bonus shares are more advantageous for existing shareholders as it allows them to benefit from the appreciation of their shares without risking any additional money or diluting their ownership stake.
On the other hand, stock splits can help to promote the liquidity and accessibility of a company’s shares while potentially signaling positive sentiment from management. Ultimately, each decision will come with its own pros and cons and should be considered carefully before making any decision about either option.
Which is better for investors?
When it comes to deciding which is better for investors, it really depends on the situation. Bonus shares are typically seen as a more attractive option because of the potential for increased returns on investment.
This is because bonus shares represent a direct increase in the number of shares an investor holds, which means their return on investment will also increase. Additionally, bonus shares can be beneficial for companies as they provide additional capital without diluting the company’s equity.
Stock splits, on the other hand, are usually less attractive to investors because they don’t change the total value of the company’s stock. Instead, the price per share decreases while the total number of shares outstanding increases. However, stock splits do have some benefits. They make trading stocks more affordable and can increase liquidity in the market. Additionally, stock splits can give a stock a psychological boost by making it seem more accessible to investors.
In the end, it’s up to investors to decide which option is best for them based on their individual investment goals. Both bonus shares and stock splits can have different advantages and disadvantages depending on the specific situation.
Therefore, investors should do their own research before deciding which option would be most beneficial for them. Investors should consider factors such as the size of their portfolio, the size of the company issuing the bonus shares or stock splits, and any tax implications associated with either option. Additionally, if there are changes proposed that could affect shareholder rights or voting rights, investors should consider these carefully before investing in either bonus shares or stock splits.
As with any investment decision, investors should take into account both short-term and long-term considerations when evaluating the possible benefits or risks associated with either bonus shares or stock splits. Ultimately, understanding the risks and rewards associated with each type of investment will help investors determine which one is best suited for their individual financial needs.
Conclusion
When it comes to choosing between bonus shares and stock splits, investors need to take into consideration their own investment goals. Bonus shares can potentially result in greater returns, but they also come with a greater degree of risk. On the other hand, stock splits are less risky but offer less potential reward.
Ultimately, it’s up to the investor to decide which option is best for them. It is important to remember that each situation is different and there is no one-size-fits-all solution. Doing research and seeking professional advice can help investors make the best decision for their individual situation.