First of all a Bonus issue issues extra shares for each share held by a shareholder, in a particular ratio. So face value doesn’t change but share price reduces proportionately and market value remains the same or more or less the same depending on market fluctuations.
Bonus Example 1:
Now for example a 4:1 Bonus issue means a shareholder will get 4 shares extra for every share he holds. So, 1 share becomes 5 shares. So, if the price of 1 share was Rs. 100 before bonus issue, the price per share will become Rs. 100*1/5 shares = Rs. 20 per share.
If the face value was Rs. 10 pre bonus , it will remain unchanged post bonus and the shareholder will get Rs. 10×5 shares = Rs. 50 in shareholder’s equity or share capital in the company’s balance sheet instead of the Rs. 10 he had with 1 share. This adjustment happens by taking (debiting) Rs. 40 from reserves and surplus or share premium account and crediting shareholders equity. So, if the original Rs. 100 market price was same as the IPO price, originally Rs. 10 was in share capital or shareholders equity and Rs. 90 was in share premium. After the bonus Rs. 50 would go to shareholders equity (share capital) and Rs. 50 would remain in share premium account. This way, since dividends are given as a percentage of face value in India, if a dividend of 10% or Rs 1 is issued, the shareholder will receive Rs. 5 post bonus instead of Rs. 1 pre bonus. This is a simplistic example for understanding.
Bonus Example 2:
To study this further, let us take another example. If a 2:3 bonus is issued then it means 2 shares are given extra for every three shares held. So, if a shareholder has 3 shares it will become 5 shares. If a shareholder has 60 he will get 40 shares more and have 100 shares.
So, if the market price of 1 share pre bonus was Rs. 100 and a person held 3 shares pre bonus, post bonus share price would be Rs. 100×3 shares/ 5 shares = Rs. 60 per share.
So, we can also have a 1:1 bonus also which means 1 extra share for every share held and hence one share becomes 2 shares.
Now for Stock Splits:
In a stock split the face value of the share reduces in proportion of the split ratio, while the market value remains the same.
A 1:2 stock means one share is split into two. So if the face value was Rs. 10 it would becomes Rs. 5. If the market price per share was Rs. 100 pre split it would become Rs. 50 per share x 2 shares post split. So if IPO price was also Rs. 100 Rs. 10 Face value and Rs. 90 share premium would become Rs. 5 face value and Rs
45 share premium per share and hence Rs. 10 and Rs. 90 respectively for 2 shares.
A 2:3 share split means 2 shares becomes 3 shares. Unlike a 2:3 bonus where 2 new shares are issued for every 3 shares held I.e. 3 share would become 5 shares.
So if the market value pre split was Rs. 100 per share, the market capitalization was 2 shares x Rs. 100 = Rs. 200
After the split the price per share would be 2× Rs. 100/3 shares = Rs. 66.67. The face value becomes Rs. 10X2/3 = Rs. 6.67 (Theoretical example, as normally face value will not be a decimal).
There can also be reverse share Splits like 4:1 where 4 shares becomes 1 share. Here the same inverse logic would apply where face value increases by 4 times and market price also increases by 4 times.
A 1:1 split doesn’t mean anything unless there are differences in terminology in certain markets where a bonus is called a split. This is because 1 share split into 1 means nothing in most share markets.
In a nutshell, Bonus issues add more value to shareholder’s as more of the money invested becomes payable to the shareholder by way of shareholder’s equity / share capital in the company’s balance sheet as amounts from reserves/surplus and/or premium account get transferred to share capital. Also, a bonus issue is similar to free extra shares/stock dividend though market price reduces and market capitalization remains the same, the shareholder benefits by way of additional shares without any tax implications. Stock splits make a company’s shares easier to buy because the per share value reduces (the same happens with bonus shares also).
This post is purely for educational purposes and not meant to be financial/investment advise.