What Is Stock Split? Bonus Shares? (#50)

What Is a Stock Split? What Are Bonus Shares?

Today, let's cover three things:

What is a stock split?
Why do companies split their shares?
What are bonus shares — and how are they actually different from a stock split?

What Is a Stock Split?

A stock split is exactly what it sounds like: splitting a company's share price into smaller units. Splitting the price doesn't affect the company's overall market capitalization or any other underlying fundamental — it only changes the share price and the number of outstanding shares.

→ Related: What Is Market Capitalization?(#43)

Example: Say company ABC is worth $100,000, with 10,000 shares outstanding, each priced at $10. After six months, the share price rises to $20 — meaning the company is now worth $200,000 — while the share count is still 10,000.

If ABC's board decides to split the stock 2-for-1, each existing $20 share becomes two $10 shares. The company now has 20,000 shares outstanding, each worth $10 — but the total market cap is still exactly $200,000. Nothing about the company's actual value changed; only the share price and share count did.

Why Do Companies Split Their Shares?

Many companies prefer to keep their share price accessible to a broader range of investors. As a share price climbs higher and higher, it can start pricing out smaller retail investors — so once a company feels its price has grown "too high," it may split the stock to bring the per-share price back down to a more approachable level.

Splits aren't always a simple 2-for-1, either — a company could split 10-for-1, for example, turning a $1,000 share into ten $100 shares. The ratio is entirely up to the company.

What Are Bonus Shares? (And How Are They Different From a Stock Split?)

This is worth being precise about, since the two are often confused — including in an earlier version of this explanation.

A bonus share is an additional share issued to existing shareholders, funded out of the company's reserves (accumulated profit that hasn't been distributed as dividends). Rather than paying shareholders a cash dividend, the company instead capitalizes some of its reserves into new shares and distributes those directly to existing shareholders, proportional to what they already hold.

→ Related: What Are Dividends?(#31)

The key distinction: a stock split is a pure mechanical division of existing shares — no company reserves are involved, and no new value is created or distributed. A bonus issue, by contrast, genuinely draws from the company's reserves to create new shares, functioning more like a stock-based alternative to a cash dividend.

In practice, both result in shareholders ending up with more shares and a lower price per share — which is exactly why the two get mixed up so often. But mechanically and accounting-wise, they're distinct corporate actions, done for different reasons: a split is mainly about accessibility and share price optics, while a bonus issue is a way of rewarding shareholders using retained profit instead of cash.

Hopefully this clears up both concepts — and corrects the mix-up between them for good. Thanks for reading.

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