Question

write notes distinguishing between stock split and stock dividend

Answer 1

Short note on stock split and stock dividend -

An investor investing in a company has expectation of growth in wealth of his investment and the company is responsible to do so for the investor. Every company pays off for the investment in the form of dividend which could be in cash or in form of stocks. In cash dividend the company pays a percentage of face value of shares as the earnings on investment but that don't provides growth to the investment as it's not reinvested and the worth remains fixed. On the contrary stock dividend are given to investor in the form of bonus shares which is proportionate to their existing holding which actually does not increases the wealth but increases the number of shares holding by an investor keeping the proportion of holding overall same.

For example suppose an investor is holding 100 shares in a company and the company pays 1:1 dividend or one for every one dividend , making the shares double to 200 and as the bonus is issued for all shares the percentage of holding remains intact.

A stock split is usually done for various reasons which could be reconstruction of company or proportionate sale of company or share reduction to lower per share value. But all of the reasons bring down the per share value of shares keeping the total worth of company same. It may be done for the investors if they find the per share value of company too high to invest.

For example suppose a company have 100 shares of 50 each which makes it a 5000 worth company. Now if a company thinks that it should split the shares into smaller units for any of the above mentioned reasons, be its too high for an investor to be invested or any other reason, it can split the per share value to 25 each and thus the total number of shares will become 200 and the total worth will be expressed as 200 shares of 25 each which makes it 5000 worth company again.