Bonus shares, a crucial aspect of investing, play a pivotal role in enhancing a shareholder’s holdings. In this comprehensive guide, we’ll explore the meaning of bonus shares, their advantages, disadvantages, types, and more, all tailored for the Indian investor community.
Understanding Bonus Shares’ Meaning
In simple terms, bonus shares are additional shares granted to existing shareholders by companies, free of cost. They are a manifestation of a company’s accumulated earnings, converted into extra shares rather than being distributed as dividends.
For example, consider Investor A holding 200 shares in a company. If the company announces a 4:1 bonus, Investor A will receive 800 additional shares for free, thereby increasing their total holding to 1000 shares.
Companies issue bonus shares to stimulate retail participation, bolster their equity base, and reduce the individual share price, making it more accessible for potential investors.
Eligibility Criteria for Bonus Shares
To be eligible for bonus shares, shareholders must own the company’s shares on or before the “record date.” This date is predetermined by the company and marks the cutoff for eligibility. The “ex-date” is one day before the record date, and shares must be purchased before this date to qualify for bonus shares.
Advantages of Bonus Shares
Advantages of bonus shares for stock market investors:
- Tax Benefits: No taxes apply when receiving bonus shares.
- Long-Term Gains: Ideal for investors looking to amplify their investments.
- Cost-Free: Bonus shares are issued by the company, enhancing liquidity.
- Trust Building: Investing in the company fosters trust in its operations.
Advantages of bonus shares For Companies:
- Enhanced Market Image: Companies gain trust and attract small investors.
- Increased Float: Bonus shares result in more shares available for trading.
- Dividend Alternatives: Bonus shares can replace cash dividends.
Disadvantages of Bonus Shares
Disadvantages of bonus shares for Stock market Investors
- Earnings Per Share (EPS) Impact: EPS can decrease despite increased shares.
Disadvantages of bonus shares for companies
- No Cash Inflow: Issuing bonus shares doesn’t bring in immediate funds.
- Accumulated Costs: Continuous issuance can accumulate costs over time.
Types of Bonus Shares in the Stock Market
- Fully Paid Bonus Shares: Distributed at no extra cost, often from profits, capital reserves, etc.
- Partly-Paid Up Bonus Shares: Convert partly-paid shares into fully paid shares, enhancing liquidity and accessibility.
Why Do Companies Issue Bonus Shares?
- Encouraging Retail Participation: Increasing outstanding shares enhances liquidity and affordability for retail investors.
- Alternative to Dividends: Especially useful for companies with irregular profits.
- Displaying Financial Health: Reflects the company’s sound financial position and growth prospects.
- Tax Benefits: Bonus shares are not taxed upon issuance.
Understanding bonus shares is essential for Indian investors aiming to capitalise on their investments. These additional shares, while offering various advantages, also come with their own set of considerations. By delving into their nuances, investors can make informed decisions that align with their financial goals.
FAQs| Bonus Shares
The perception of bonus shares varies among investors. Some see them as advantageous because they increase the total number of shares held, potentially leading to increased dividends. However, others might be concerned about the potential dilution of ownership and its impact on the stock’s value.
A 2:1 bonus share ratio indicates that for every 1 existing share you hold, you receive an additional 2 shares. This can be a way for companies to reward shareholders by increasing their ownership without altering the value of their investment.
When you receive bonus shares, your overall ownership in the company increases without affecting the total value of your investment. This can lead to greater liquidity and potentially enhanced dividend income, although the value of each individual share might decrease due to the increased supply.
A 1:10 share bonus signifies that for every 10 shares you already own, you are granted 1 additional share. This mechanism can serve as an incentive for shareholders, promoting a sense of ownership and potentially boosting trading activity.
Bonus shares come with advantages such as improved liquidity due to increased share availability. However, there’s a potential downside: the dilution of ownership can result in reduced individual ownership percentages, impacting decision-making influence and earnings per share.
The advantage of bonus shares lies in their ability to increase the number of shares held without affecting their value. Conversely, stock splits involve adjusting the share price while maintaining the overall value, appealing to different investor preferences and strategies.
Generally, bonus shares do not directly reduce share prices. While the increased number of shares might impact the supply-demand dynamics, the fundamental value of the company’s assets remains unchanged.
In most cases, you can sell bonus shares immediately after they are credited to your account. This provides flexibility for shareholders who may choose to trade these additional shares based on market conditions or personal preferences.
Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.