The main advantage of bonus shares includes increased shareholder loyalty, as they reward existing investors without requiring additional investment. They enhance share liquidity, improve market perception, and lead to a broader shareholder base by making the stock more affordable to small investors.
Content:
- What Are Bonus Shares?
- Bonus Shares Example
- Benefits Of Bonus Shares
- Advantages Of Bonus Shares – Quick Summary
- Benefits Of Bonus Shares – FAQs
What Are Bonus Shares?
Bonus shares are additional shares given to the current shareholders of a company, free of charge, based on the number of shares they already own. These shares are issued from a company’s accumulated earnings or reserves, without any monetary cost to the shareholders.
Issuing bonus shares effectively redistributes a company’s retained earnings into its capital. This increases the company’s share capital while keeping its equity intact. It’s a method for companies to reinvest their profits into the business without spending cash.
For shareholders, bonus shares are beneficial as they increase the number of shares they hold, potentially enhancing their returns, especially if the company’s performance is strong. It also signifies company confidence and financial stability, often leading to a positive market response.
For example: If a company issues 1:2 bonus shares, it means for every 2 shares owned, a shareholder gets 1 extra share. If you own 100 shares, you’ll receive 50 bonus shares, at no extra cost.
Bonus Shares Example
When a company declares a 1:2 bonus issue, shareholders gain one extra share for every two owned, boosting their holdings without additional cost. However, though the share quantity rises, the share price usually adjusts, keeping the company’s market capitalization constant.
In such a scenario, if a shareholder owns 100 shares of a company and the current market price is Rs 300 per share, post the bonus issue, they will have 150 shares. However, the market might adjust the price to around Rs 200 per share to reflect the increased share count but the same overall market value of the company. The shareholder’s total investment value remains the same, but they own more number of shares.
Benefits Of Bonus Shares
The main benefit of bonus shares is that they reward existing shareholders by increasing their number of shares without extra cost. This improves liquidity and can signal company confidence, potentially boosting the stock’s appeal. Additionally, it makes the stock more affordable to retail investors.
- Rewarding Shareholders: Bonus shares are a reward to existing shareholders, issued without additional cost. By receiving more shares, shareholders benefit from their loyalty and investment in the company, reflecting the company’s appreciation for their continued support.
- Improving Liquidity: Issuing bonus shares increases the number of shares in circulation, which can enhance the liquidity of the stock. Higher liquidity often results in better price discovery and makes it easier for shareholders to buy or sell the shares in the market.
- Signaling Confidence: When a company issues bonus shares, it often signals confidence in its future prospects. This action can be interpreted as the company’s belief in sustained earnings and growth, positively influencing investor sentiment and potentially increasing the stock’s appeal.
- Making Shares More Affordable: Post bonus issue, the stock price typically adjusts to reflect the increased number of shares. This price adjustment can make the shares more affordable to retail investors, thus widening the investor base and potentially increasing market participation.
Advantages Of Bonus Shares – Quick Summary
- The main benefits of bonus shares are rewarding shareholders with more shares at no cost, boosting liquidity, signaling company confidence, enhancing stock appeal, and making the stock more affordable for retail investors.
- Bonus shares are additional, free shares given to current shareholders based on their existing holdings, issued from a company’s earnings or reserves at no monetary cost, reflecting appreciation and confidence.
Benefits Of Bonus Shares – FAQs
The main benefit of bonus shares is rewarding loyal shareholders with increased shareholdings without additional investment, enhancing stock liquidity, signaling company confidence, and making shares more affordable to a broader range of investors.
Bonus shares are calculated based on a ratio, like 1:2, where shareholders receive one bonus share for every two owned, proportionate to their current holdings, without any additional payment.
The main beneficiaries of bonus shares are existing shareholders, who receive additional shares at no extra cost, proportionate to their existing holdings, effectively increasing their stake in the company without additional investment.
Companies give bonus shares to reward loyal shareholders, enhance stock liquidity, adjust share prices for affordability, signal financial health and confidence, and utilize accumulated earnings without impacting their cash reserves.
The crediting of bonus shares typically occurs within 15 days from the record date set by the company. This period allows for the necessary adjustments in shareholders’ accounts to reflect the new share distribution.
After issuing bonus shares, the company’s share price often adjusts to reflect the increased share count, maintaining the market capitalization. Shareholders see an increase in share quantity, but the total investment value remains largely unchanged.
In many jurisdictions, receiving bonus shares is not taxed as income. However, taxes may apply on any capital gains when selling these shares, calculated based on the adjusted cost after the bonus issue. Tax regulations can vary by country.
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know:
