Difference Between Stock Dividend and Stock Split

When the bank gives its dividend to the customers in cash, it is called a cash dividend. When the bank gives the dividend through additional stocks, it is called a stock dividend. The Stock Split means splitting existing shares to create more shares. Both terms are nothing alike.

Stock Dividend vs Stock Split

The stock market is one of the most complex places in the economy. Stock dividends are paid to the customers with the profits of the stocks. A Stock Split means making more shares of a company by splitting existing shares. These operations are carried out every day.

In the world of economics, there are two ways for a company to pay a dividend to its customers: They are dividends paid in cash and dividends paid on further stocks. Several factors compel the bank to pursue any of the options.

Stock Splits are classified into two types: There are forward Stock Splits and backward Stock Splits performed to increase the number of shares in the company. A backward Stock Split is performed when the number of shares needs to be decreased.

Comparison Table Between Stock Dividend and Stock Split

Parameters of ComparisonStock DividendStock Split
DefinitionStock Dividend is the way the company pays its customers with money.The Stock Split is when the company decides to increase or decrease the ratio of stocks by splitting existing stocks.
Main ObjectiveStock Dividend is required to increase the creditworthiness of the company without bleeding cash.Stock Stock Splitting is important. It allows small-scale retailers to take part in the company share.
Reason for AdoptingIt works as an incentive for the loyal shareholder base by more shares of the company.The main reason for Adopting this is to develop the marketing and bring in new liquid money
Face and Market ValueFace value increases after the dividend. But market value is likely to decrease.After a split, the proportion ratio drops. More people own the same amount of value.
Reserve CapitalReserve Capital will always decrease proportionately.Reserve Capital does not change at all

What is Stock Dividend?

A stock dividend is something that is given to shareholders instead of money. It is simply giving stocks instead of money.

Nowadays, companies often issue additional shares to their loyal stakeholders.

Many critical calculations are in place here. If the issue of a stock dividend is excessive and remains unchecked, the stock price will be diluted. Stock prices will decline rapidly and cause inflation.

The stock dividend is normally given as a bonus issue. It means that the stock issued to the people is free of charge.

How many shares a stakeholder will receive depends on the manufacturers. It may depend on the specific ratio, the stakeholder’s interest in the company, or the general policy imposed by the market.

If an organization is short of cash, it can certainly go for a stock dividend declaration. A stock dividend decreases the price of a particular share and makes it more affordable to scores of investors.

The declaration of dividends is a positive sign. It highlights a company’s financial prowess. For instance, if a company has an extra 100 shares and makes a profit of $100,000, If it declares a 20% dividend, the person will receive $100 in shares instead of cash.

What is Stock Split?

A Stock Split is when the additional stocks are subdivided into various pieces and given to the small retailer. The capital remains unchanged.

This is a clever economic solution, provided that the company does not have any cash to pay up. It allows the company to distribute its shares among a larger crowd. This creates financial stability and a solid stakeholder base.

This is an economic move for the company. It makes the share available to a large number of people.

The Stock Split will not change any market capital. So the amount of money in the market remains the same.

In another interesting case, the company in question might split the stock to hide its actual profit. The split stocks do not change the price in any way. With the same profit, the stock number increases.

When Stock Splitting occurs, liquidity increases. The increased number increases the number of total stakeholders.

For example, suppose you held 100 shares of the company with a face value of $1000 before the split. After a 1:10 split, you will own 1000 shares with a value of $100.

Main Differences Between Stock Dividend and Stock Split

There are many differences between Stock dividends and Stock Split. Some of them are as follows:

  1. Stock dividend is giving the portion of profit to the shareholders with the mean of additional stocks. Stock Split is subdividing the existing stocks.
  2. Stock dividend causes no change in the face value. On the other hand, face value decreases in case of the occurrence of the Stock Split.
  3. When the company does not have a sufficient amount of hard cash to distribute the profit they go for the stock dividend option.
  4. When the company wants to increase the liquidity of shares, they declare a Stock Split.
  5. When the company needs liquidity they share the stock dividend. When they need to tome down their high priced share they opt for the Stock Split.

Conclusion

The stock market is a very critical place. The right investment can lead to wealth, whereas the wrong investment will lead to poverty.

To compensate for the lack of cash or hard money, the company declares stock dividends. This is just a way to share the company’s profit without using any cash.

This is a very effective way to keep the profits of the company within the company. Moreover, normally the stakeholders would sell this additional amount of shares and earn some extra cash.

Stock Splitting means subdividing the additional stock to increase the number of shares sold to more people.

Splitting does not benefit the existing shareholders. But it benefits the stock market in general.

References

  1. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.1987.tb03919.x
  2. https://www.sciencedirect.com/science/article/abs/pii/0304405X84900114
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