Bonus market
WHAT ARE THE EFFECTS OF A BONUS ISSUE? In 1980 you buy 100 shares @ rs 100 per share in your name .
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Bonus shares – A positive sign.
WHAT ARE THEY?
Bonus shares are issued in a certain proportion to the existing holders. A 2 for 1 bonus would mean you get two additional shares — free of cost — for the one share you hold in the company.If you hold 100 shares of a company and a 2:1 bonus offer is declared, you get 200 shares free. That means your total holding of shares in that company will now be 300 instead of 100 at no cost to you.
WHO BEARS THE COST IF IT’S FREE FOR ME?
You are right. There is no free lunch.Bonus shares are issued by cashing in on the free reserves (accumulated profits) of the company.A company builds up its reserves by retaining part of its profit over the years (the part that is not paid out as dividend). After a while, these free reserves increase, and the company wanting to issue bonus shares converts part of the reserves into capital.So you do not pay; and the company’s profits are not impacted.
WHAT ARE THE EFFECTS OF A BONUS ISSUE?
Bonus shares do not directly affect a company’s performance. Bonus issue has following major effects.
1. Share capital gets increased according to the bonus issue ratio.
2. Liquidity in the stock increases.
3. Effective earnings per share, book value and other per share values stand reduced.
4. Markets take the action usually as a favorable act.
5. Accumulated profits get reduced.
6. A bonus issue is taken as a sign of the good health of the company.
WILL THE SHARE PRICE CHANGE AFTER BONUS ISSUE?
A bonus issue adds to the total number of shares in the market.Say a company had 10 million shares. Now, with a bonus issue of 2:1, there will be 20 million shares issues. So now, there will be 30 million shares.This is referred to as a dilution in equity.Now the earnings of the company will have to be divided by that many more shares.(earnings per share = net profit/ number of shares)since the profits remain the same but the number of shares has increased, the EPS will decline.Theoretically,when EPS declines, the stock price should also decrease proportionately. But, in reality, it may not happen.
I. The stock is now more liquid. Now that there are so many more shares, it is easier to buy and sell.
Ii. A bonus issue is a signal that the company is in a position to service its larger equity. What it means is that the management would not have given these shares if it was not confident of being able to increase its profits and distribute dividends on all these shares in the future.
THE RECORD DATE.
When a bonus issue is announced, the company also announces a record date for the issue. The record date is the date on which the bonus takes effect, and shareholders on that date are entitled to the bonus.
After the announcement of the bonus but before the record date, the shares are referred to as cum-bonus. After the record date, when the bonus has been given effect, the shares become ex-bonus.
HOW BONUS SHARES CREATES ENORMOUS WEALTH
Bonus shares, in the long run would create enormous wealth for the investor. For example, a rs 10,000 invested in wipro in 1980 would have grown into several crores as shown below:-
In 1980 you buy 100 shares @ rs 100 per share in your name . In 1981 company declared 1:1 bonus = you have 200 shares
In 1985 company declared 1:1 bonus = you have 400 shares. In 1986 company split the share to rs. 10 = you have 4,000 shares
In 1987 company declared 1:1 bonus = you have 8,000 shares. In 1989 company declared 1:1 bonus = you have 16,000 shares
In 1992 company declared 1:1 bonus = you have 32,000 shares in 1995 company declared 1:1 bonus = you have 64,000 shares
In 1997 company declared 2:1 bonus = you have 1,92,000 shares. In 1999 company split the share to rs. 2 = you have 9,60,000 shares
In 2004 company declared 2:1 bonus = you have 28,80,000 shares. In 2005 company declared 1:1 bonus = you have 57,60,000 shares
In 2010 company declared 2:3 bonus=you have 96,00,000 shares.
Share price of wipro is rs 428.00 in july 2010
The value of 57,60,000 shares in 2010 – 406.60 crores.
CONCLUSION
Declaring bonus shares is a sign that companies are increasing their profitability. If you look back, many companies have announced issues of bonus shares to their shareholders by capitalizing their free reserves . Shareholders have benefited tremendously, even after accounting the inevitable reduction in share prices post-bonus, since the floating stock of shares increases. So keep an eye on bonus history when you decide to buy a stock-it may be a good indicator that the company is healthy.
How bonuses work
Bonus programs reflect a company’s definition of success, how that definition is measured, and the extent to which that measure is met.
Bonuses are similar from company to company. The reason is that most companies subscribe to a pay-for-performance philosophy whereby bonuses are tied to two important measures: how well you are doing with respect to your manager’s expectations; and how well your company is doing with respect to its expectations.
Individual and group performance goals are hard to set, because they should be neither too ambitious nor too easy to achieve. It is best for employees to set next year’s performance goals once current year results are known. However, the manager should resist the temptation to base an employee’s performance goals on an outstanding year. When that happens, both employee and manager can become disappointed. In these instances, managers often give their employees discretionary bonuses at the end of the year to make up for the loss of performance-based bonuses.
Managers also give out discretionary bonuses – bonuses that are not tied to a formal performance target – when it is too difficult to establish formal performance goals.
Depending on the bonus program and your level within the organization, your bonus may be determined not only by your own performance, but also by the performance of your team or work group. Some companies use a 2 X 2 payout grid with individual objectives on one axis and a corporate goal on the other. Under these types of bonus programs, your actual bonus can range anywhere from half your target bonus to double your target – or nothing.
In some bonus programs, the company may have to meet targets of its own for anyone in the company to receive a bonus. For example, the company may need to meet a certain minimum in net income; or a certain level of customer satisfaction; or a certain competitive position in the market. This minimum is usually 80 to 85 percent of what is required for the bonus target to be met.
Inclusion of nonfinancial goals such as market share or customer satisfaction is relatively new, reflecting a deepening understanding of operational measures that indicate the economic health of the company. When the number of goals includes many variables reflecting not only your primary responsibility, but also how you manage your relationships throughout the organization, your bonus grid becomes what is known as a “balanced scorecard.” this approach is becoming popular because companies recognize the complexity of a position’s contribution to the company and want to evaluate its performance holistically.
Range of bonus payouts
annual incentive bonuses are meant to be motivational. They are designed to reward employees for fulfilling their responsibilities and for delivering superior results. Bonus targets and their associated payouts reflect a range of expected levels of performance.
Just think of a star baseball pitcher who has an incentive clause in his contract based on the number of games he wins. For winning 15 games, he will get $1 million; for 20 games he will get $3 million; and for 23 games he will get $7 million. This is what an annual incentive bonus plan looks like.
As a bonus plan participant, you are that star athlete who is rewarded for performing at a level appropriate to your ability. You are also rewarded for having a great year.
If the goals given to you are unrealistic, you and your boss can be in for disappointment and trouble. Annual incentive programs are built around the expectations that the company has of itself and of you. Bonus plan participants can expect to achieve minimum acceptable performance (i.E.—for their boss to remain happy with it) and receive a bonus payment 90 percent of the time and achieve target level of performance or better at least 60 percent of the time.
| Expected performance level | level of difficulty | likelihood of achievement | payout as a percentage of target opportunity |
| minimum (acceptable) | 80% of target | 90% | 50% |
| target | — | 60% | 100% |
| maximum | 120% of target | 15% | 200% |
Suppose that your target bonus is 20 percent of a base salary of $100,000 and you performed at the maximum performance level. That means you would earn 200 percent of that 20 percent bonus, or 40 percent. This would result in a $40,000 check ($100,000 x 20%(your target bonus) X 200% (payout level)).
In most industries, the target bonus percentages are similar, and depend on salary. Exceptions include the high-technology and investment banking industries. In nonprofit organizations and healthcare, bonuses remain rare.
Typical bonus levels as a percentage of salary
| Base salary | target bonus (%) |
| less than $75,000 | 0* |
| $75,000-$99,999 | 10-15 |
| $100,000-$149,999 | 15-20 |
| $150,000-$199,999 | 20-30 |
| $200,000-$299,999 | 30-40 |
| $300,000-$499,999 | 40-60 |
| $500,000 or more | 60-100 |
*bonuses for this range are not typical, and if rewarded, are usually discretionary.
How bonuses work
Bonus programs reflect a company’s definition of success, how that definition is measured, and the extent to which that measure is met.
Bonuses are similar from company to company. The reason is that most companies subscribe to a pay-for-performance philosophy whereby bonuses are tied to two important measures: how well you are doing with respect to your manager’s expectations; and how well your company is doing with respect to its expectations.
Individual and group performance goals are hard to set, because they should be neither too ambitious nor too easy to achieve. It is best for employees to set next year’s performance goals once current year results are known. However, the manager should resist the temptation to base an employee’s performance goals on an outstanding year. When that happens, both employee and manager can become disappointed. In these instances, managers often give their employees discretionary bonuses at the end of the year to make up for the loss of performance-based bonuses.
Managers also give out discretionary bonuses – bonuses that are not tied to a formal performance target – when it is too difficult to establish formal performance goals.
Depending on the bonus program and your level within the organization, your bonus may be determined not only by your own performance, but also by the performance of your team or work group. Some companies use a 2 X 2 payout grid with individual objectives on one axis and a corporate goal on the other. Under these types of bonus programs, your actual bonus can range anywhere from half your target bonus to double your target – or nothing.
In some bonus programs, the company may have to meet targets of its own for anyone in the company to receive a bonus. For example, the company may need to meet a certain minimum in net income; or a certain level of customer satisfaction; or a certain competitive position in the market. This minimum is usually 80 to 85 percent of what is required for the bonus target to be met.
Inclusion of nonfinancial goals such as market share or customer satisfaction is relatively new, reflecting a deepening understanding of operational measures that indicate the economic health of the company. When the number of goals includes many variables reflecting not only your primary responsibility, but also how you manage your relationships throughout the organization, your bonus grid becomes what is known as a “balanced scorecard.” this approach is becoming popular because companies recognize the complexity of a position’s contribution to the company and want to evaluate its performance holistically.
Range of bonus payouts
annual incentive bonuses are meant to be motivational. They are designed to reward employees for fulfilling their responsibilities and for delivering superior results. Bonus targets and their associated payouts reflect a range of expected levels of performance.
Just think of a star baseball pitcher who has an incentive clause in his contract based on the number of games he wins. For winning 15 games, he will get $1 million; for 20 games he will get $3 million; and for 23 games he will get $7 million. This is what an annual incentive bonus plan looks like.
As a bonus plan participant, you are that star athlete who is rewarded for performing at a level appropriate to your ability. You are also rewarded for having a great year.
If the goals given to you are unrealistic, you and your boss can be in for disappointment and trouble. Annual incentive programs are built around the expectations that the company has of itself and of you. Bonus plan participants can expect to achieve minimum acceptable performance (i.E.—for their boss to remain happy with it) and receive a bonus payment 90 percent of the time and achieve target level of performance or better at least 60 percent of the time.
| Expected performance level | level of difficulty | likelihood of achievement | payout as a percentage of target opportunity |
| minimum (acceptable) | 80% of target | 90% | 50% |
| target | — | 60% | 100% |
| maximum | 120% of target | 15% | 200% |
Suppose that your target bonus is 20 percent of a base salary of $100,000 and you performed at the maximum performance level. That means you would earn 200 percent of that 20 percent bonus, or 40 percent. This would result in a $40,000 check ($100,000 x 20%(your target bonus) X 200% (payout level)).
In most industries, the target bonus percentages are similar, and depend on salary. Exceptions include the high-technology and investment banking industries. In nonprofit organizations and healthcare, bonuses remain rare.
Typical bonus levels as a percentage of salary
| Base salary | target bonus (%) |
| less than $75,000 | 0* |
| $75,000-$99,999 | 10-15 |
| $100,000-$149,999 | 15-20 |
| $150,000-$199,999 | 20-30 |
| $200,000-$299,999 | 30-40 |
| $300,000-$499,999 | 40-60 |
| $500,000 or more | 60-100 |
*bonuses for this range are not typical, and if rewarded, are usually discretionary.
Share market school
New to investing?
Try our beginner's lessons
Follow us on:
Bonus shares – A positive sign.
WHAT ARE THEY?
Bonus shares are issued in a certain proportion to the existing holders. A 2 for 1 bonus would mean you get two additional shares — free of cost — for the one share you hold in the company.If you hold 100 shares of a company and a 2:1 bonus offer is declared, you get 200 shares free. That means your total holding of shares in that company will now be 300 instead of 100 at no cost to you.
WHO BEARS THE COST IF IT’S FREE FOR ME?
You are right. There is no free lunch.Bonus shares are issued by cashing in on the free reserves (accumulated profits) of the company.A company builds up its reserves by retaining part of its profit over the years (the part that is not paid out as dividend). After a while, these free reserves increase, and the company wanting to issue bonus shares converts part of the reserves into capital.So you do not pay; and the company’s profits are not impacted.
WHAT ARE THE EFFECTS OF A BONUS ISSUE?
Bonus shares do not directly affect a company’s performance. Bonus issue has following major effects.
1. Share capital gets increased according to the bonus issue ratio.
2. Liquidity in the stock increases.
3. Effective earnings per share, book value and other per share values stand reduced.
4. Markets take the action usually as a favorable act.
5. Accumulated profits get reduced.
6. A bonus issue is taken as a sign of the good health of the company.
WILL THE SHARE PRICE CHANGE AFTER BONUS ISSUE?
A bonus issue adds to the total number of shares in the market.Say a company had 10 million shares. Now, with a bonus issue of 2:1, there will be 20 million shares issues. So now, there will be 30 million shares.This is referred to as a dilution in equity.Now the earnings of the company will have to be divided by that many more shares.(earnings per share = net profit/ number of shares)since the profits remain the same but the number of shares has increased, the EPS will decline.Theoretically,when EPS declines, the stock price should also decrease proportionately. But, in reality, it may not happen.
I. The stock is now more liquid. Now that there are so many more shares, it is easier to buy and sell.
Ii. A bonus issue is a signal that the company is in a position to service its larger equity. What it means is that the management would not have given these shares if it was not confident of being able to increase its profits and distribute dividends on all these shares in the future.
THE RECORD DATE.
When a bonus issue is announced, the company also announces a record date for the issue. The record date is the date on which the bonus takes effect, and shareholders on that date are entitled to the bonus.
After the announcement of the bonus but before the record date, the shares are referred to as cum-bonus. After the record date, when the bonus has been given effect, the shares become ex-bonus.
HOW BONUS SHARES CREATES ENORMOUS WEALTH
Bonus shares, in the long run would create enormous wealth for the investor. For example, a rs 10,000 invested in wipro in 1980 would have grown into several crores as shown below:-
In 1980 you buy 100 shares @ rs 100 per share in your name . In 1981 company declared 1:1 bonus = you have 200 shares
In 1985 company declared 1:1 bonus = you have 400 shares. In 1986 company split the share to rs. 10 = you have 4,000 shares
In 1987 company declared 1:1 bonus = you have 8,000 shares. In 1989 company declared 1:1 bonus = you have 16,000 shares
In 1992 company declared 1:1 bonus = you have 32,000 shares in 1995 company declared 1:1 bonus = you have 64,000 shares
In 1997 company declared 2:1 bonus = you have 1,92,000 shares. In 1999 company split the share to rs. 2 = you have 9,60,000 shares
In 2004 company declared 2:1 bonus = you have 28,80,000 shares. In 2005 company declared 1:1 bonus = you have 57,60,000 shares
In 2010 company declared 2:3 bonus=you have 96,00,000 shares.
Share price of wipro is rs 428.00 in july 2010
The value of 57,60,000 shares in 2010 – 406.60 crores.
CONCLUSION
Declaring bonus shares is a sign that companies are increasing their profitability. If you look back, many companies have announced issues of bonus shares to their shareholders by capitalizing their free reserves . Shareholders have benefited tremendously, even after accounting the inevitable reduction in share prices post-bonus, since the floating stock of shares increases. So keep an eye on bonus history when you decide to buy a stock-it may be a good indicator that the company is healthy.
Bonus issue
What is a bonus issue?
A bonus issue, also known as a scrip issue or a capitalization issue, is an offer of free additional shares to existing shareholders. A company may decide to distribute further shares as an alternative to increasing the dividend payout. For example, a company may give one bonus share for every five shares held.
Key takeaways
- A bonus issue of shares is stock issued by a company in lieu of cash dividends. Shareholders can sell the shares to meet their liquidity needs.
- Bonus shares increase a company's share capital but not its net assets.
Understanding bonus issues
Bonus issues are given to shareholders when companies are short of cash and shareholders expect a regular income. Shareholders may sell the bonus shares and meet their liquidity needs. Bonus shares may also be issued to restructure company reserves. Issuing bonus shares does not involve cash flow. It increases the company’s share capital but not its net assets.
Bonus shares are issued according to each shareholder’s stake in the company. Bonus issues do not dilute shareholders’ equity, because they are issued to existing shareholders in a constant ratio that keeps the relative equity of each shareholder the same as before the issue. For example, a three-for-two bonus issue entitles each shareholder three shares for every two they hold before the issue. A shareholder with 1,000 shares receives 1,500 bonus shares (1000 x 3 / 2 = 1500).
Bonus shares themselves are not taxable. But the stockholder may have to pay capital gains tax if she sells them at a net gain.
For internal accounting, a bonus issue is simply reclassification of reserves, with no net change in total equity, although its composition is changed. A bonus issue is an increase in the share capital of the company along with a decrease in other reserves.
Advantages and disadvantages of issuing bonus shares
Companies low on cash may issue bonus shares rather than cash dividends as a method of providing income to shareholders. Because issuing bonus shares increases the issued share capital of the company, the company is perceived as being bigger than it really is, making it more attractive to investors. In addition, increasing the number of outstanding shares decreases the stock price, making the stock more affordable for retail investors.
However, issuing bonus shares takes more money from the cash reserve than issuing dividends does. Also, because issuing bonus shares does not generate cash for the company, it could result in a decline in the dividends per share in the future, which shareholders may not view favorably. In addition, shareholders selling bonus shares to meet liquidity needs lowers shareholders' percentage stake in the company, giving them less control over how the company is managed.
Stock splits and bonus shares
Stock splits and bonus shares have many similarities and differences. When a company declares a stock split, the number of shares increases, but the investment value remains the same. Companies typically declare a stock split as a method of infusing additional liquidity into shares, increasing the number of shares trading and making shares more affordable to retail investors.
When a stock is split, there is no increase or decrease in the company's cash reserves. In contrast, when a company issues bonus shares, the shares are paid for out of the cash reserves, and the reserves deplete.
How bonuses work
Bonus programs reflect a company’s definition of success, how that definition is measured, and the extent to which that measure is met.
Bonuses are similar from company to company. The reason is that most companies subscribe to a pay-for-performance philosophy whereby bonuses are tied to two important measures: how well you are doing with respect to your manager’s expectations; and how well your company is doing with respect to its expectations.
Individual and group performance goals are hard to set, because they should be neither too ambitious nor too easy to achieve. It is best for employees to set next year’s performance goals once current year results are known. However, the manager should resist the temptation to base an employee’s performance goals on an outstanding year. When that happens, both employee and manager can become disappointed. In these instances, managers often give their employees discretionary bonuses at the end of the year to make up for the loss of performance-based bonuses.
Managers also give out discretionary bonuses – bonuses that are not tied to a formal performance target – when it is too difficult to establish formal performance goals.
Depending on the bonus program and your level within the organization, your bonus may be determined not only by your own performance, but also by the performance of your team or work group. Some companies use a 2 X 2 payout grid with individual objectives on one axis and a corporate goal on the other. Under these types of bonus programs, your actual bonus can range anywhere from half your target bonus to double your target – or nothing.
In some bonus programs, the company may have to meet targets of its own for anyone in the company to receive a bonus. For example, the company may need to meet a certain minimum in net income; or a certain level of customer satisfaction; or a certain competitive position in the market. This minimum is usually 80 to 85 percent of what is required for the bonus target to be met.
Inclusion of nonfinancial goals such as market share or customer satisfaction is relatively new, reflecting a deepening understanding of operational measures that indicate the economic health of the company. When the number of goals includes many variables reflecting not only your primary responsibility, but also how you manage your relationships throughout the organization, your bonus grid becomes what is known as a “balanced scorecard.” this approach is becoming popular because companies recognize the complexity of a position’s contribution to the company and want to evaluate its performance holistically.
Range of bonus payouts
annual incentive bonuses are meant to be motivational. They are designed to reward employees for fulfilling their responsibilities and for delivering superior results. Bonus targets and their associated payouts reflect a range of expected levels of performance.
Just think of a star baseball pitcher who has an incentive clause in his contract based on the number of games he wins. For winning 15 games, he will get $1 million; for 20 games he will get $3 million; and for 23 games he will get $7 million. This is what an annual incentive bonus plan looks like.
As a bonus plan participant, you are that star athlete who is rewarded for performing at a level appropriate to your ability. You are also rewarded for having a great year.
If the goals given to you are unrealistic, you and your boss can be in for disappointment and trouble. Annual incentive programs are built around the expectations that the company has of itself and of you. Bonus plan participants can expect to achieve minimum acceptable performance (i.E.—for their boss to remain happy with it) and receive a bonus payment 90 percent of the time and achieve target level of performance or better at least 60 percent of the time.
| Expected performance level | level of difficulty | likelihood of achievement | payout as a percentage of target opportunity |
| minimum (acceptable) | 80% of target | 90% | 50% |
| target | — | 60% | 100% |
| maximum | 120% of target | 15% | 200% |
Suppose that your target bonus is 20 percent of a base salary of $100,000 and you performed at the maximum performance level. That means you would earn 200 percent of that 20 percent bonus, or 40 percent. This would result in a $40,000 check ($100,000 x 20%(your target bonus) X 200% (payout level)).
In most industries, the target bonus percentages are similar, and depend on salary. Exceptions include the high-technology and investment banking industries. In nonprofit organizations and healthcare, bonuses remain rare.
Typical bonus levels as a percentage of salary
| Base salary | target bonus (%) |
| less than $75,000 | 0* |
| $75,000-$99,999 | 10-15 |
| $100,000-$149,999 | 15-20 |
| $150,000-$199,999 | 20-30 |
| $200,000-$299,999 | 30-40 |
| $300,000-$499,999 | 40-60 |
| $500,000 or more | 60-100 |
*bonuses for this range are not typical, and if rewarded, are usually discretionary.
Bonus market
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Introducing bonus money market account
Unlock your money’s true potential
Bonus money market account
Earn up to 0.40% APY* each month**
Exciting news! We’ve got an amazing new money market account - yet another great way for you to make your money work for you.
Unlock up to 0.40% APY* each month** with our new bonus money market account.
Combined with our bonus checking, our new bonus money market account helps you earn even more!
Qualifying for the higher rate is easy!
- Open a bonus checking account
- Enroll in estatements
- Swipe your debit or credit card 12 times per month for a minimum of $5 per swipe
That’s it! When you meet these requirements, you’ll enjoy a sweet sweet rate on your bonus MMA.
| TIER | QUALIFYING* BONUS MMA RATE APY | NON-QUALIFYING BONUS MMA RATE APY |
|---|---|---|
| $0.01 - $49,999.99 | 0.20% APY | 0.05% APY |
| $50,000 - $99,999.99 | 0.30% APY | 0.10% APY |
| $100,000 - $249,999.99 | 0.35% APY | 0.20% APY |
| $250,000+ | 0.40% APY | 0.25% APY |
Why open a bonus money market account?
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Call 800.433.1837 or visit a branch to open your bonus money market account today.
Here’s the legal stuff: *APY=annual percentage yield. **qualifiers to earn interest on bonus money market include meeting the qualifiers for a bonus checking account on the same account number. These bonus checking qualifiers include any combination of 12 transactions of $5 or more on your bonus checking account debit card or numerica credit card under the same member account (excluding transactions at atms) and enrollment in estatements with a valid email address. If the bonus checking qualifiers are not met, the rate will default to the non-qualifying bonus money market rate. No minimum balance required to earn APY. Rates may change after account opening. $25 deposit required to open a bonus checking account. $25 deposit required to open a bonus money market account. Requirements are calculated for each calendar month. Fees may reduce earnings. Limit of 1 bonus money market account per social security number. APY accurate as of 02/01/21. Qualifying bonus money market apys are: 0.20% APY for $0.01 - $49,999.99, 0.30% APY for $50,000 - $99,999.99, 0.35% APY for $100,000 - $249,999.99, and 0.40% APY for $250,000+. Non-qualifying bonus money market apys are: 0.05% APY for $0.01 - $49,999.99, 0.10% APY for $50,000 - $99,999.99, 0.20% APY for $100,000 - $249,999.99, and 0.25% APY for $250,000+. Numerica deposits are federally insured by NCUA.
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Stock split vs bonus share – basics of stock market
Stock split vs bonus share – basics of stock market
Most of the beginners are confused about stock split vs bonus share. Whenever they hear that one of their holding stock is going to split or is giving a bonus share, they do not understand what does this mean and how this will affect their investment.
As both results in an increase in the quantity of stocks and adjustment of share price, most beginners are confused whether they are same or different.
Further, they do not understand why company announces stock split or bonus share. What is the basic difference between them?
Therefore, in this post, I’m going to explain you the difference between stock split vs bonus share with the help of few past examples from indian share market.
Be with me for the next 5-6 minutes to understand this basic of the stock market.
Past example of stock split vs bonus share:
Stock split
Yes bank split its share in the ratio of 1:5 on 26th july 2017. This means that every shareholder who has 1 share of yes bank, had got 5 shares in total.
If you were holding 30 shares of yes bank, you would have got a total of 150 shares.
You might be thinking- ‘awesome, I got extra shares for free!!’.
However, after the stock split, the share price of the stock also splits in the same ratio. Here is the chart of yes bank after the stock split.
Please notice that the stock price of yes bank changed from rs 1880 to rs 376 after the split.
Moreover, the price chart gets adjusted after the stock split. Therefore if you look at the same chart few months/years later than the split date, it’s impossible to estimate the date/year of the stock split. For example, here’s the price chart of yes bank (as of june 2018). Here, you cannot notice any spike or fall in the price of the stock split in july 2017. This is because the price history of the stock got adjusted automatically.
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Why does this happen and what is the impact of the stock split on its shareholders? This we will study in next section in this post.
Bonus share
Now, let us see an example of bonus shares.
Hindustan petroleum corporation limited (HPCL) announced bonus shares to its shareholders in two consecutive years.
First, on 20th july 2016 in the ratio of 2:1.
Second, on 26th may 2017 in the ratio of 1:2.
| Announcement date | bonus ratio | record date | ex-bonus date |
| 26-05-2017 | 1:2 | 12-07-2017 | 11-07-2017 |
| 20-07-2016 | 2:1 | 15-09-2016 | 14-09-2016 |
In the first case, the shareholders got 2 shares for every 1 share in their portfolio.
In the second case, the shareholders got 1 share for every 2 shares in their portfolio.
If you notice the stock chart of HPCL on google, you cannot identify the bonus stock dates.
You cannot decide the bonus given by the share chart as there are no sharp spikes on the chart. In the bonus share, the stock prices are automatically adjusted.
However, if you check the chart on money control, you can notice two bonuses of the share of HPCL.
How does this happen? This we will study in next section.
Stock split vs bonus stock
We will first understand bonus shares. We will define some financial terms here, which we are also going to use later in the post.
1. Bonus shares:
Bonus shares are the additional shares given to the shareholders by the company. This is a method of rewarding the shareholders.
How does a company give the bonus?
Companies accumulate its profits in the reserve fund. During bonus share, these reserve funds are converted into share capital and distributed among its shareholders as a bonus.
In short, when a company gives bonus shares, it’s share capital increases while its reserve fund decreases.
Why companies give a bonus?
Here are the few reasons why company gives a bonus to its shareholders:
- For rewarding its shareholders.
- To improve the liquidity and hence, the total trading volume of the stock.
- To decrease the share price and to make it more affordable for retail investors.
- It increases the confidence of the shareholders towards the company.
Impact of bonus shares on shareholders:
Although a bonus share is a positive news for the shareholders, however, it doesn’t affect their investment amount much. After the bonus is given, the share price of the company will fall in the same proportion.
Therefore, there will be no noticeable difference in the wealth of shareholder.
2. Stock split:
In a stock split, the company splits the share price into different parts.
For example, in a stock split of 1:1, stock price splits into two parts.
In a stock split of 1:5, stock splits into 5 parts.
The fundamentals of a company remain same in a stock split. There is neither increase or decrease in the share capital or reserve in a stock split.
You can remember stock split as splitting the pieces of pizza. You can split the 4 pieces of pizza into 8, however, the overall pizza will be the same.
Why company split stocks?
Here are the few reasons why company split its share:
- To increase the liquidity of the stock and increase the trading volume.
- To make the stock more affordable for the retail investors.
Impact of the stock split on shareholders:
There won’t be much impact on the personal wealth of the shareholder.
1 stock of rs 10,000 or 5 stocks of rs 2,000; both are same for the existing shareholders.
NOTE: during a stock split, EPS (earnings per share) decreases in the same factor as stock split (because the earnings will be same, but the number of outstanding shares will increase). Hence, the price to earnings (PE) ratio will remain the same (as both price and EPS decreases by the same factor).
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Example: stock split vs bonus share
Assume there is a company, ABC. This company is currently trading in the market at a stock price of rs 100.
Face value of each share = rs 10.
Total number of outstanding shares = 10,000
Reserve capital = rs 5,00,000
Now, the market capitalization of the company ABC
Case 1: bonus shares
Now, let us assume that the company has announced a bonus share of 1:1.
The company will give an additional share of 10,000 to its existing shareholders.
Total number of outstanding share = 2*10,000 = 20,000
Decrease in reserve capital = 10 * 10,000 = rs 1,00,000
Net reserve capital for the company = rs 5,00,000 – rs 1,00,000 = rs 4,00,000
As the market capitalization will remain the same after the bonus share, hence the market value of the stock = 10,00,000 / 20,000 = rs 50.
Case 2: stock split
Let us assume that the company makes a stock split of 1:1 (in place of the bonus share).
Hence, the market value of stock after split = rs 50 Here are the changes on different parameters due to stock split vs bonus share:
Originaly stock split (1:1) bonus share (1:1) stock price rs 100 rs 50 rs 50 face value rs 10 rs 5 rs 10 outstanding share 10,000 20,000 20,000 market capitalization rs 10,00,000 rs 10,00,000 rs 10,00,000 reserve capital rs 5,00,000 rs 5,00,000 rs 4,00,000
Please note that the face value of a stock also splits during the stock split and the reserve capital decreases in bonus share.
The stock price will automatically be adjusted on both stock split and bonus share on the day of implementation.
Summary:
Stock split vs bonus stock
In simple words, a stock split is the split of same stock into many parts while the bonus is free additional shares.
Stock price and outstanding shares changes in both stock split and bonus share.
While share split has no impact on the fundamentals of the company, on the other hand, reserve capital decreases in bonus share.
Bonus share is taken positively by the shareholders while there is no impact of the stock split on the shareholders.
That’s all for this post. I hope you have understood the difference between stock split vs bonus share.
If you have any doubts, feel free to comment below.
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Hi, I am kritesh (tweet me here), an NSE certified equity fundamental analyst and an electrical engineer (NIT warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #happyinvesting
Good article. Just mention one more advantage of bonus share. In case of bonus share, investors can earn more in form dividends as dividends are based on face value and it does not change in case of bonus share. Hence bonus shares indirectly rewards investors in terms of more returns on dividends.
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So, let's see, what was the most valuable thing of this article: bonus shares, in the long run would create enormous wealth for the investor. It is a sign that companies are increasing their profitability. If you look back, many companies have announced issues of bonus shares to their shareholders by capitalizing their free reserves . Shareholders have benefited tremendously, even after accounting the inevitable reduction in share prices post-bonus, since the floating stock of shares increases. So keep an eye on bonus history when you decide to buy a stock-it may be a good indicator that the company is healthy. ..Read more. At bonus market
Contents of the article
- Free forex bonuses
- Share market school
- Bonus shares – A positive sign.
- How bonuses work
- How bonuses work
- Share market school
- Bonus shares – A positive sign.
- Bonus issue
- What is a bonus issue?
- Understanding bonus issues
- Advantages and disadvantages of issuing bonus...
- Stock splits and bonus shares
- How bonuses work
- Bonus market
- Introducing bonus money market account
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- Why open a bonus money market account?
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- Stock split vs bonus share – basics of stock...
- Past example of stock split vs bonus share:
- Stock split vs bonus stock
- 2. Stock split:
- Example: stock split vs bonus share
- Summary:
- Stock split vs bonus stock
- Leave a reply cancel reply
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