Decoding Bonus Shares: Meaning, Types, Advantages and Disadvantages

What is Bonus Share?

Bonus shares are free shares the company offers to its shareholders from its earned profits or reserves. They are sometimes referred to as scrip issues or capitalization issues. A company issues bonus shares usually in proportion to the number of shares the shareholder already owns.

These shares are given in a fixed ratio, such as 1:2, which allows for one additional share for every two shares that a shareholder owns. Giving out bonus shares expands the number of floating shares but does not affect the overall market capitalization of the business.

In other words, it is a procedure to convert the amount of the retained earnings of the company into share capital and issue it to the shareholders in their demat account in the ratio of their existing stake in their.

Types of Bonus Shares

Bonus shares are classified into the following main types:

 

Fully Paid Bonus Shares

These are new shares floated in the market for sale to existing shareholders at no cost. They are issued out of the retained earnings of the company and the shares are fully paid-up or the shareholders are not required to pay for these shares.

 

Partly Paid Bonus Shares

These are shares offered to shareholders with the understanding that only part of the face value is paid at the time of issue. As for the remaining amount, shareholders might be able to pay in installments. Nevertheless, this type of issue is comparatively less frequent than fully paid bonus shares.

 

What is the Eligible Criteria for Bonus Shares?

Bonus shares are usually declared by the company’s board of directors. All the current shareholders, as per the record date of that particular declaration, are entitled to get bonus shares. The record date is a particular date that the company determines to establish which shareholders are entitled to the bonus shares.

 

If the bonus share is to be issued on this following date, any shareholder owning the company’s shares before this date will be rewarded with the bonus shares in the stated ratio.

 

As a new investor you can start your investment journey by opening a free demat account with a reliable stock broker like Almondz Trade or any other platform. Choose the right stock for your portfolio which can deliver you high returns.

 

Advantages of Bonus Shares

Here are all the main benefits of bonus shares every investor and trader must know:

• Increased Shareholding: The process entitles shareholders to obtain more shares in the company without contributing any fresh capital towards the stock purchase.
• Enhanced Liquidity: Bonus shares lead to an increase in the overall number of shares in the market, hence improving the liquidity of the share. This could also make it easy for investors to trade in shares of the company without affecting the price of the stock too much.
• Improved Market Perception: The issue of bonus shares can be regarded as a confidence indication from the side of the firm’s management. It usually tells the investors that the firm is doing well and that it has enough profits or reserves to give to the shareholders.
• Tax Benefits: Bonus shares are also not subject to tax when they are issued in the market. The shareholders do not pay taxes on the gains as long as they retain the shares, thus an element of tax control.

 

Disadvantages of Bonus Shares

Following are the main disadvantages of bonus shares you must know:

• Dilution of Earnings per Share (EPS): If the company’s profits do not rise proportionately to the number of shares, earnings per share (EPS) may then decline. This may have the capacity of demoralizing the investors and, therefore, making the stock less attractive to them.
• No Immediate Cash Benefit: From the above analysis, bonus shares are different from dividends because they do not give an instant cash value to the shareholders. In the near term, therefore, bonus shares may not be a great idea for investors who are seeking regular income.
• Potential Market Misinterpretation: At times, through the bonus issue, the market may perceive that the company does not have better investment opportunities for retained earnings.
• Administrative Costs: Bonus shares entail some specific costs that comprise administrative and regulatory charges, which are incurred by the firm.

 

Conclusion

Now that you know 'what do you mean by bonus share', you can better capitalize on your investment. The decision to issue bonus shares is generally in the interest of the firm as well as shareholders.

To companies, it provides a method of rewarding shareholders and making optimum use of retained profits. To shareholders, it enhances their share ownership and likely future gains. Follow the latest bonus shares news to get updates on your investment.