New Delhi, March 19 -- Stock splits and bonus issues are two of the most popular instruments used in the Indian stock market by the firms to reward their shareholders and thereby create market liquidity.

Now it is a given that both provide for an increase in the number of shares, still both are used for distinct purposes and have varied effects on investors. Five key points are given below that can be used to understand the difference between stock splits and bonus issues better:

A bonus issue is the issue of free extra shares to existing shareholders, usually from the retained earnings of the company. This increases the dividend for the shareholders, and they can hope that the company has sound finances thus more investors are attracte...