Investing in stocks is relatively easy. You research stocks through technical and fundamental analysis and invest in them if you feel that they are undervalued and can rise in price in the future. Once you invest, you become the shareholder of the company and part owner, entitled to a share in the company’s profits through dividends. However, when you invest in listed shares, the company that has offered its shares has the right to change the number of shares you hold through two processes called bonus issues and stock splits. These two processes can benefit your overall return as they increase the number of shares you hold.
If you are an investor or looking to invest, it is important to understand bonus issues and stock splits, as they are common in the Indian stock market. This blog will help you understand the difference between a bonus issue and a stock split for a better investment approach and handling of your investments.
What is a bonus issue?
The first factor in understanding the difference between a bonus issue and a stock split is learning about a bonus issue. A bonus issue, also known as a scrip issue, is a stock market process where a company that has its shares listed on the stock exchanges issues additional shares to its current shareholders at no additional cost. During a bonus issue, the shareholders get an additional number of shares as a bonus based on the number of shares they already hold.
Bonus shares are issued in proportion to the existing shares. For example, a 1:1 bonus issue means that for every share a shareholder owns, they receive one additional share. Although bonus shares increase the number of shares, a shareholder's investment value remains the same, as the stock price usually adjusts by falling to reflect the increased number of shares outstanding.