Bonus issue Vs Stock Split : Similarities and Dissimilarities

The real benefit of investing in shares of companies are the corporate benefits like bonus issues and stock splits. Had you invested in WIPRO in 1980 for Rs.10000, you would have got 100 shares of Rs.100 each. Today after 23 years, after a series of bonuses and stock split, you have 96,00,000 shares ( Yes 96 Lakh shares), valued at around Rs.400 Crores !!!

Similar is the result with CIPLA (Rs.10000 invested in 1978, is worth Rs.95 Crores), and Infosys (Rs.10000 invested in 1992, is worth today Rs.2.5 Crores).

No doubt, every investor would like to invest in such stocks. But very few have succeded in identifying / investing / staying invested in such stocks. And it is never too late to start identifying / investing in such stock. But before that let us understand the difference between Bonus Vs Stock Split.

Similarities:

1) If a company share with face value of Rs.10 issues bonus shares in 1:1 ratio, post bonus the number of shares would be twice with each share being Rs.10 face value. Whereas if the company goes in for stock split from Rs.10 face value to Rs.5 face value, here again the number of shares would be twice, but with face value being reduced to Rs.5. The similarity is, post bonus or stock split, the share price would be reduced ( halfed here ), to he extent of bonus/stock split.

2) Hence the market value of the company would remain the same post bonus / stock split.

3) Since the number of stocks get multiplied, the liquidity profile of the stock improves.

4) The stocks become more affordable, since the stock prices fall drastically, attracting more investors.

Differences:

1) Post Bonus issue, the face value of the stock remains the same, where as in stock split the face value gets reduces.

2) Benefits like dividends are always declared on the face value. Hence investors get more dividend in a Bonus stock than in a stock split stocks.

Hence Bonus issue is more beneficial to long term investors. But you need to have patience to stay invested for quiet long (10+ years) to genuinely benefit.