Introduction to Bonus share, Cash Dividend & Stock Split

Bonus Share

Bonus share is giving an additional share to current shareholders without additional cost. When a company makes a profit they provide either cash dividend or bonus share. Nowadays, many companies prefer to give bonus share so that they can invest that additional amount to maximize their profit.

For example; if a person has 500 shares and the company declares a 20% bonus share from the profit then the person gets additional 100 shares without any cost.

In the context of Nepal, many companies issue bonus shares than a cash dividend. In especially, the banking sector issues bonus share to its shareholder to raise their paid-up capital. Bonus share is given out of the profit or reserves of the company. If the investor has a share till the book closing date then they will get the bonus share.

For example, ABC company announces 15 % of bonus share from the fiscal year 2020/021 with a book closure date of 16 May 2020. It means if a person has 500 shares of ABC company till 16th may then they will get 75 shares as a bonus share.

Cash Dividend

When companies make a profit they have to give some profit to their shareholders. So, when companies give a certain percentage of profit to its shareholder as cash, it is known as a cash dividend. So, it is a distribution of funds to its shareholders from their earning or reserve.

Cash dividend provides on the basis of a number of shares it means if you have more shares you get more and vice-versa. For example; if you have 500 shares of XYZ company with the face value of RS 100 and the company declares to distribute 10% of cash dividend then you will get Rs 500 as a cash dividend.

After announcing the cash dividend there will be the book closure date and after that day the market share price will adjust according to the cash dividend.

Stock Split

When a company wants to increase its stock’s liquidity it can split stock. Stock split means dividing the existing stock into multiple new shares. Although the number of stocks increases, the total value of the stocks will remain the same as the pre-split amount. For example; ABC company wants to split share in 2 for 1 means your current share will be double after the split.

Although the number of outstanding shares increased by a specific multiple, the value of the share remains the same as the pre-split amount. A stock split is a corporate action where a company divides its existing share. When the outstanding share increases the face value of the company will decrease.  

When companies market price too high company choose to split their stock, also to make the demand and supply equal sometimes company choose to split stock. Recently, Nepal Life insurance (NLI) proposes the 2 for 1 stock split.

This means that the face value of each share will be Rs 50 as compared to Rs 100 at present. The main purpose of the stock split is to make more shares in the market make shares available for the small investors at affordable prices.

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