What are bonus shares?
When you buy shares of a company, long-term capital appreciation and dividends are not the only benefits that we can avail ourselves of. We are also given bonus shares by the company which increases our shareholding. In recent years, stock market participation has increased. But many investors don’t know about bonus shares and their benefits. In this article, we will discuss the meaning of bonus share and their benefits.
Bonus shares
Bonus shares are the additional shares issued to existing shareholders. There are no fixed timings for issuing these shares. The company can announce bonus share offerings if it has a surplus. When company doesn’t want to distribute this surplus in the firm of dividend, it issues bonus shares. It requires approval from the board of directors. After that shares are credited to shareholders’ accounts.
The reason behind issuing bonus shares
- Capitalization of reserves: By issuing bonus shares, companies can convert their accumulated earnings from the reserve account to share capital Which is distributed among its existing shareholders.
- Increase in share liquidity: By issuing bonus shares, companies increase their number of shares which enhances market liquidity. Hence it becomes easier for small investors to trade.
- Earning per share adjustment: In the initial phase, earnings per share may decrease. This can reduce the share price which will attract more investors. In this way, companies increase their future earnings.
- Boosting the company’s reputation: Issuing bonus shares can create a positive image of the company. This also enhances the shareholder’s loyalty. Issuing bonus shares is a sign that the company is making profits. In this way company can enhance its reputation in the market.
Benefits of bonus shares
- Bonus shares provide more shares to the investors and their investment increases. It becomes easier for them to buy and sell stocks.
- It is beneficial for the people who are willing to invest for longer durations. They can make more money over some time.
- When companies pay dividends, shareholders will be given more dividends due to an increase in the number of shares held by them.
- It also increases the trust of investors in the company as issuing bonus shares indicates that the company can grow without spending extra money.
We have discussed the reasons and advantages of bonus shares. However, there are some negative aspects too. Due to issuing bonus shares, earnings per share decreases which can negatively affect the dividends of investors. When a company issues a bonus share, it does not receive any cash. It also reduces the flexibility of the company to make its capital budgeting decisions. You should also know that there’s a difference between bonus shares and right-issue shares. When an existing company issues new shares in the market, it gives right to its existing shareholders to buy a proportion of the new shares. That’s why these are known as right issue shares. You should remain updated with the latest information regarding the stock market. You should keep an eye on the upcoming bonus issues of the company. So that you can purchase shares of relevant companies before the ex-date. Before investing in shares, it is advised to open a demat account through a reputed stockbroker like 5paisa which provides the best trading facilities to its customers. In this way, you can diversify your portfolio and increase your investment efficiently.
