What is Bonus Share? A Comprehensive Guide
When it comes to shareholder remuneration, firms have many tools at their disposal which they can use. The most frequently used technique is coupled with an issue of bonus shares. But what is a bonus share for that matter? How does it work, and why would some firms use it in place of simply implementing dividends? Bonus shares are one of the most common types of Corporation’s profit distribution; in this guide, we’ll look at what they represent and why, for investors and business, bonus shares are the key to success.
What is Bonus Share?
Bonus share is another type of share that is issued out to the current share holders of a firm without any additional capital being injected into the theusbandy. In other words, these shares are provided from the company’s reserves especially the retained earnings for use in its business. For investors, it’s like getting an added “gift” on the current investment they made. Bonus shares are similar to cash dividends, but companies award them in the form of shares, they keep liquidity and offer their shareholders something that benefits them. Well, that answers What is Bonus Share? It is a way that many companies can reward their shareholders while at the same time conserving cash in the organization.
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Bonus Issue: Actual and Proposed by the Companies:
A comprehension of What is Bonus Share? also comprises the factors that make a company embark on such a decision. Here are several key motivations:
Reinvestment of Profits: Where profits can be distributed in the form of cash dividends, companies might use retained earnings by offering bonuses in form of shares. This makes the capital to remain within the organization for future use.
Enhancing Liquidity: As the number of shares in the market is large, the liquidity in the market is bound to increase. There exists a possibility that a higher number of shares will make trading easier for investors thereby increasing market activities.
Adjusting Share Prices: At other times, a company’s shares become overvalued and can be unaffordable for small investors to access. Offering bonus shares bring down the price for the stock, but the value for each individual investor does not decrease.
Signalling Confidence: Those firms that declare bonus shares usually do so with the aim of passing a statement to the market that they are optimistic about their future earnings. Such statements create an impression that the company wants to continue recording success in the future; hence, it can help grow investors’ confidence and investment.
In conclusion, in this paper, we discussed some of the possible reasons for which companies issue bonus shares including increasing the liquidity of share, the company’s management desire to show the market confidence in future earnings among others.
Example of Bonus Shares
Before explaining What is Bonus Share? we must take an example that can make it easier to understand. Suppose you hold 100 shares in a company that announces a bonus share issue in a 2:1 ratio. This means that for every one share you already own, you will be given an additional two shares. In total you will have 300 shares after the bonus issue has been done. Like it happens with the shares, the price per share is always standardized in a way that the overall cost of investment will not change due to the presence of many shares.
For example, if the share price before the bonus issue was ₹30 then it is likely to reduce to ₹10 after the bonus. The total value of your investment is ₹3,000 but you now have more of the shares say 400 shares instead of 300 you had before.
Effects of Bonus on Shareholders
Another question often associated with What is Bonus Share? is how it is for shareholders. Stock dividends raise the total number of stocks, you own but it does not raise the total value of your stock. This is issued together with a bonus share issue, the company float is many, but the price per share drops off in proportion to the bonus shares.
But this does not in anyway imply that bonus shares are a minor component. However, the possibility exists that you own more shares of the company and standing good to benefit in future through high stock prices though the company may only do well in the future.
Effect on the Fluctuation of a Company’s Market Capitalisation
Every person who wants to learn about What is Bonus Share? must also learn about how it impacts the market capitalisation of a company. Surprisingly, the market capitalisation does not change upon the declaration of bonus shares. The total amount of the shares on offer rises, whilst the price per share is reduced in ratio. Market capitalisation which is obtained by multiplying the number of shares in the stock by the price of the stock remains the same.
However, bonus shares can enhance the liquidity of the company’s items and therefore make the stocks preferable in the market. While more investors buy the shares, it could give future boost to the higher market capitalization as well as the value of the stock.
Key Dates for Bonus Shares
To maximize the benefits from bonus shares it is crucial to know these dates If it is so. Below are some critical dates every investor should be aware of when a company announces bonus shares:
- Announcement Date: The company makes an announcement to its shareholders with a view of offering bonus shares.
- Record Date: This is the date beyond which, shareholders who are eligible for the bonus shares will be determined. You have to own the shares on this date.
- Ex-Bonus Date: After this date the share begins to trade without the value of the bonus shares incorporated in its price. If you purchase stocks on the ex-bonus date or even after that date, you cannot be awarded the bonus shares.
- Bonus Share Credit Date: The period of time by which bonus shares are actually reflected in your dematerialized account. This usually happens after three to five days of the record date.
To prospective bonus share shareholders, the above dates are significant so as to enhance their understanding of the entire process.
Eligibility for Bonus Shares
The bonus shares are not available for every share holder in the market. For this one, you need to hold the stock before the ex-bonus date so you could be eligible for a proportionate amount of shares of that bonus to be issued by the company. Bear in mind that the ex-bonus date is generally one day prior to the record date because of the several days taken to accomplish the startups of stock markets in the settlement of shares. In case you wish to benefit from the bonus issue, it is requisite that you have purchased and continue to possess the shares as at this date.
What is Bonus Share?: Advantages of Bonuses to the Company
Therefore, the process of answering the question What is Bonus Share? should never be complete without considering how it helps firms. In companies ‘ house, bonus shares are methods of rewarding the shareholders with out depleting cash reserves. The increase of the number of shares, which are in float, can also enhance liquidity level and investor base appeal. Further, bonus shareholders are beneficial in lowering the price of the company’s stock thus making them attractive to a broad market.
Advantages of Bonus Shares to Investors
For shareholders, the benefits of bonus shares are plentiful:
- Increased Shareholding: Some of the points include; You can buy more shares without any addition cost; hence your stock is boosted.
- Potential for Long-Term Growth: While the basic concept of your investment would provide similar amount of stocks your ownership increases potentially in the future due to the improved stock performance.
Are Bonus Shares Good or Bad?
One of the most basic questions people ask while searching for What is Bonus Share?; Is Bonus Share good or bad? The answer to the above question depends with the investment strategy one has in mind. The situation where new stocks are distributed to shareholders without additional costs is perfect for those investors, who are willing to have more stakes in the company for a long time. However, for those who wish to get paid instantly or get richer fast, then such companies have a tendency to pay cash dividends.
Last but not least, bonus shares are viewed as a long term growth tool, especially for people who are optimistic about the company’s future.
Bonus Shares vs. Stock Splits
At the start of the discussion about What is Bonus Share?, it will prove helpful to set bonus shares and stock splits apart from one another. A stock split occurs when a company emerges new shares out of its existing one with an aim of reducing the price per share whilst retaining the shareholders percentage. On the other hand, bonus shares are new shares to be issued to shareholders without changing its market share structure.
Conclusion: What is Bonus Share?
At the end of Understanding What is Bonus Share? section, investors gain knowledge of one of the strategies adopted by companies to compensate shareholders. This type of gains may not be seen soon as bonus shares on your investment must only result in increased shareholding which leads to more shares in the long run. Management benefits by having cash reserves, increase in liquidity and by indicating faith in future operations. Bonus shares can be considered to be of much interest to investors because of their possible tax advantages and future increase in shares value, especially for those who plan the long term investment. (What is Bonus Share?, What is Bonus Share?, What is Bonus Share?)
FAQs
This topic is dedicated to understanding what exactly bonus shares refer to.
Share bonuses on the other hand are extra stocks issued to shareholders and provided at nil cost to them.
Are bonus shares good or bad?
It’s for investors who wish to increase their stakes within firms without incurring additional costs.
For what reason does a company issue bonus shares?
To enable shareholders to earn higher returns, to changes in the price of shares and to provide greater marketability of shares.
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