Cash Dividend means dividend which is paid to shareholders in Cash/ Bank. When a company doesn’t have cash for payment of dividends, it gives dividends in the form of equity or we can say that additional shares of the Company are allotted to the shareholder. This term is called Stock Dividend. Stock Split is one of the forms of Corporate Action. Stock Split and Stock Dividend are different, and cannot be used interchangeably. Let’s understand the Stock Split. As the name itself tells the meaning, Stock Split means splitting of Stock or Equity Shares. Stock splits are splitting of already issued shares to increase the no. of shares of the Company.
The distribution of Profit to Equity shareholders is known as Dividends. The dividend is of two types namely:
- Cash Dividend
- Stock Dividend
In simple words, the dividend which is paid in the form of equity or shares instead of Cash is known as Stock Dividend. Now the question comes why the Company pays a dividend in Equity Form. There are some reasons for distributing Stock dividends by the company. Below are the main reasons for stock dividends:
- The company doesn’t have sufficient cash to pay the dividend.
- To increase the Issued shares of the Company.
- To give the Tax benefit to the shareholder, which means that when a dividend is paid in Cash it is Taxable as Income, but when paid in the equity shares, it will be taxable only when the shareholder sells the shares. Hence, Investors will get tax benefits.
Advantages of Stock Dividend:
- Increase the Liquidity of Cash,
- Increases the Liquidity of Shares in the market
- Increases the investor interest in the company by giving Tax Benefits.
To understand it better let’s take an example, Mr. A is holding 10000 Shares of Company XYZ Limited having a face value of Rs. 100 and market value Rs. 150. Now, company XYZ Limited declares the Stock Split in the ratio of 2 for 1 which means that for every 1 share, a shareholder will get 1 more share. In this example, Mr. A is holding 10000 Shares, after the stock split his shareholding will increase to 20000 shares. Be noted that the price of the share due to stock split will go down and no. of shares will increase.
The stock split is performed by the company for increasing or decreasing the no. of shares in the market and the value of shares. The stock split which increases the no. of shares is called as forwarding Stock Split and stock split which decreases the no. of shares is called Reverse Stock Split. Why the Company performs the Stock Split? Reasons are as mentioned below:
- When the Board of Directors of the company thinks that the market price of the share is overpriced. Hence, to reduce the price of share.
- To increase the liquidity of shares.
- Due to the reduction of Price, it allows more investors to buy the shares.