Bonus Issues and Stock Splits – Good or Bad?

I just received a document from Cypark Resources Berhad, stating that I as a shareholder will receive 1 bonus share for every 2 Cypark shares I hold.

What are Share Bonus Issues?

A bonus issue is an offer of free additional shares to existing shareholders. They’re basically gifts to shareholders of the company, rewarding you and me with additional shares at no cost.

The bonus shares are issued and paid out of the retained profits of a company.  They’re issued as a ratio, based on the number of shares held by the shareholder. For example, Cypark handed out bonus shares at a ratio of 2 : 1. For every 1 share held, shareholders get 2 bonus shares for free.

Why are Bonus Shares Issued?

  1. To reward shareholders
  2. Boost investor sentiment and market confidence
  3. Increase liquidity
  4. Adjust the stock price to a reasonable range

Difference Between a Bonus Issue and Stock Split

Both have many similarities as well as differences. Stock splits only serves one purpose – To increase the number of shares. Ie. To adjust the share price of the company to a lower level.

Many Malaysian investors still believe a company like Nestle whose share price is RM145 per share is “expensive”. Investing RM10,000 into Nestle or a low price share is the same thing. You’re investing RM10,000. End of story. 

When a stock is split, there is no change in the company’s cash reserves. In contrast, when a company declares a bonus issue of shares, the bonus shares are paid for out of the accumulated profits of the company, depleting reserves.

End.

I hope this clears the air on bonus issues and stock splits.

TL;DR – Bonus issues are a plus for the company, stock splits are neutral.

Happy investing!

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