Before we understand these two concepts, let me explain you these two terms:
- Face Value: It is nothing but the nominal value of the share so fixed by the company in the beginning. It is the value at which the company registers itself initially. It won’t change daily with the market forces.
- Market Price: It is the price at which the share is trading in the stock exchange. It is always fluctuating depending on buyer(s) and seller(s).
The Market Price of Infosys ltd. is around Rs.1400 whereas its Face Value is only Rs.5.
Okay, another small basic economic concept which one must know.
More the supply, lesser would be the Market Price. Less the supply, more would be the Market Price.
Stock Split
Say, you have a rectangular piece of chocolate. It was worth Rs.10. You decide to cut this into two equal parts. So now, you have two pieces of chocolate each worth Rs.5.
This is what happens in case of a Stock Split. The company going for a stock split will reduce its ‘Face Value’ and the number of shares would increase proportionately.
Say, a company has issued 1 lakh shares of Face Value Rs.10 and the Market Price is Rs.500.
If the company is going for stock split and say the Face Value is reduced to Rs.5, then the total shares would increase to 2 lakh. Also, the Market Price would be adjusted as the supply of the share has now doubled.
That’s all about the stock split.
Bonus
Bonus is something completely different from Split.
Say, I have 1 chocolate and now I am getting 1 free on this chocolate, so now I have 2 chocolates. This is how Bonus shares work.
Say, a company has issued 1 lakh shares of Face Value Rs.10 and the Market Price is Rs.500.
Now, if the company declares Bonus of 1:1, then every shareholder will get 1 extra share for 1 share held. This would double the number of shares. Here, the Face Value shall not change. It is intact at Rs.10.
If you remember the above concept, you will now know that the supply of share has doubled and hence the Market Price will also proportionately get adjusted to half.
What difference will it make to a shareholder?
The total market valuation of all the shares in totality held by the shareholder in case of Stock Split and Bonus will remain the same as before and technically it actually won’t make much of a difference to a shareholder.
But, in case of Bonus Share, you have extra shares with the same Face Value and when a company declares dividend, it is always declared on Face Value. Hence, a Shareholder will get double dividend as compared to the one in case of a Stock Split.
Hence, for a shareholder’s point of view, Bonus is more rewarding than a Stock Split.
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