Split Share and Bonus Issue of Shares
Relationships Between Stock Split and Bonus Issue of Shares & their pros and cons Presented by Rajib Deb Student of M - Split Share and Bonus Issue of Shares introduction. COM. 4th Sem. Tripura University, Suryamaninagar What is stock split? A stock split is a corporate action that increases the number of the corporation’s outstanding shares by dividing each share, which in turn diminishes its price. The stock’s market capitalization, however, remains the same, just like the value of the Rs. 100 does not change if it is exchanged for two 50s.
For example, with a 2-for-1 stock split, each stockholder receives an additional share for each share held, but the value of each share is reduced by half: two shares now equal the original value of one share before the split. What is bonus issue of share? A bonus share is a free share of stock given to current shareholders in a company, based upon the number of shares that the shareholder already owns. While the issue of bonus shares increases the total number of shares issued and owned, it does not change the value of the company.
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Al though the total number of issued shares increases, the ratio of number of shares held by each shareholder remains constant. Relation between stock split & bonus issue of share: ? In both bonus shares and stock split the number of shares of a company increases. In case of bonus shares the earnings per share decreases proportionate to the number of bonus shares issued. for e. g. : if company issues bonus shares in ratio of 1:1 and the earnings per share is Rs. 200 , then after bonus issue, the corresponding EPS will be Rs. 100. Generally company issue this in place of giving dividends.
In the case of bonus issue the market capitalization doesn’t get affected. whereas in split shares the face value of share decreases, and the total number of shares increases. For example, if a company issued one lakh shares of face value of Rs 10 each, the company’s share capital is Rs 10 lakhs. Now, if the company split the face value to Re 1 per share, the total number of shares will be multiplied by 10 (that is, 10 lakh shares) but the paid up capital will still remain Rs 10 lakhs. Pros and Cons of Stock Split: Pros: ? Affordability of each share is improved; ? More shares are available so share holders have a wider ownership base; ?
Investors expectations of price ranges; ? Certain investors prefer stocks that keep splitting. ? More liquidity; Cons: ? People treat shares as more sellable on A whim if each share costs less; ? Costs of the split itself; ? Listing requirements; Pros and Cons of bonus issue: • Pros: ? Increase in number of shares without extra cost; ? Increase in wealth of investors when stock prices goes up in the long run. ? Tax benefits to the shareholders; ? Conservation of Cash. ? Economical Issues. Cons: ? Making no difference to the value of the company; ? To the company – as issue of this may lead to increase in capital of the company.
? Shareholder expect existing rate of dividend per share to continue. ? It also prevents the new investors from becoming the shareholders of the company. ? Shareholder preferring cash to stock dividend may be disappointed. Conclusion: So, in conclusion part we can say that, if someone is an investor in the company, he has reason to celebrate when he get a bonus. But don’t need to celebrate when company splits stock. It’s just a technical change in the face value of the stock. But if he wants to buy more shares, it is good news because now, he will be able to afford them or at least get them at cheaper price. Thank You…..