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Stock Split vs Bonus Issue: In the world of equity investing, corporate activities like stock splits and bonus issues usually generate a lot of interest and anticipation among the shareholders. Both occurrences result in a multiplication of investors' shares and make the stock price look more affordable — but they work very differently.

Investors must be aware of these differences in order to evaluate the impact on value, perception, and long-term returns properly.

A stock split is merely an adjustment in the face value of a company's shares based on arithmetic calculations. For example, during a 1:5 split, each share, which has a face value of Rs 10, will be divided into five shares with a face value of Rs 2 each. The company’s total market capitalisation remains unchanged.

Bonus issue, on the contrary, is corporate dividends to stockholders in the form of extra shares, which the company distributes from its reserve or profit account. A 1:1 bonus means that the shareholders get one extra share for every one share they hold, and the face value remains unchanged.

In the scenario of a stock split, the newly issued shares would be formed by the existing shares' division — no funds or reserves would be put to use.

On the other hand, during a bonus issue, the company makes use of its free reserves or retained earnings by way of capitalisation. Basically, the company takes a part of its profit and transfers it to share capital; this indicates the company's strong financial health.

Both measures result in a reduced price per share unit, although the causes vary. The adjustment in stock price in a stock split is done according to the split ratio, thus keeping the total value of the investors unchanged.

Conversely, in a bonus issue, the market capitalisation typically does not change right away, but it usually sends out a positive signal of confidence — sometimes, this leads to a short-term price rise as a result of a better mood in the market.

The main goal of a stock split is to make the market more liquid and more accessible, particularly when the prices of shares are too high for small investors.

On the other hand, a bonus issue is seen as an award and also a way to build trust, indicating the management’s strong belief in the company’s ability to generate profits over a long period.

After a stock split, the company’s total paid-up capital stays the same. On the contrary, after a bonus issue, the paid-up capital increases because the reserves have been converted into equity.

The future dividends per share may be lower in the case of a bonus issue due to the increased number of shares outstanding, which is often overlooked by retail investors.

Currently working as a trainee Sub-Editor at Zee Business, Shristi Rani is passionate about storytelling and delivering content that engages diverse audiences across digita