Question

Define share buy-backs, bonus share issues and share splits, and explain how they differ.

Answer 1

Bonus Issue offers additional shares to the existing shareholders without any cost. Companies with low cash balance might issue bonus share rather than cash dividend as a method of providing regular income to its shareholders. Issuing bonus shares increases the number of shares which results in decrease in the stock price of the company in proportion to the bonus ratio, and this makes the stock attractive for retail investors who might hesitate to invest in companies that are fundamentally strong but are available at higher rate.

Stock split is the action taken by management in which a company divides its existing shares into multiple shares to boost liquidity of shares. Split is usually applied when the stock price is high, making it too pricey for investors to acquire. It brings down the share price since number of share increases but the value of the stocks remains the same. The only thing that gets divided is the face value. The primary motive is to make share affordable to retail investors.

Share buyback is the re-acquisition of its ownshares by a company. In a corporation can repurchase its own stock by distributing cash to existing shareholders in exchange for a fraction of the company's outstanding equity in order to reduce its cost of equity.

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