Bonus shares, also known as stock bonuses or scrip dividends, are a fascinating aspect of the financial world that many investors may find intriguing. These shares can be a valuable addition to your investment portfolio, but understanding bonus shares meaning, fully is essential before you decide to invest. In this comprehensive guide, we'll explore what is bonus share, why companies issue bonus shares, how they work, their advantages and disadvantages, and some real-world examples to help you grasp this concept.
What are Bonus Shares?
Bonus shares are additional shares that a company distributes to its existing shareholders at no additional cost. These shares are issued to the shareholders in proportion to their current holdings. In other words, for every x number of shares you already own, you receive y number of bonus shares. The face value of the bonus share is typically the same as the existing shares.
Why Do Companies Issue Bonus Shares?
- Capitalization: One of the primary reasons companies come up with bonus issue or bonus shares is to capitalize on their retained earnings. By converting a portion of these earnings into bonus shares, the company can increase its share capital without affecting its cash reserves.
- Liquidity Improvement: Bonus shares can also enhance the liquidity of a company's stock in the market. As more shares become available, trading volumes often increase, making it easier for investors to buy and sell the company's stock.
- Share Price Adjustment: Issuing bonus shares can lead to a reduction in the market price per share. This can make the stock more affordable to a wider range of investors, potentially increasing demand.
How Do Bonus Shares Work?
To understand how bonus shares work, let's consider the hypothetical scenario of the bonus issue of ITC Ltd. in the year 2016:
ITC Ltd. announced a bonus of 1:2 on 20-May-16 with a Record Date of 04-Jul-16 and an Ex-Bonus Date on 01-Jul-16
So, what does this mean from the investor's point of view;
- Eg. If an investor had 100 shares of ITC Ltd as of Record Date 04-Jul-16
- Then as per the bonus ratio of 1:2, for every 2 shares held the investor received 1 bonus share i.e. for 100 shares he received 50 bonus shares
- So, after the bonus issue, the investor will have 150 shares (100 original shares + 50 bonus shares), but the total value of his investment remains the same.
Eligibility Criteria for Receiving Bonus Shares
Not all shareholders automatically receive bonus shares. Companies typically set a record date to determine eligible shareholders. To be eligible, you must hold shares in your demat account as of the record date.
What is a Record Date?
The record date is the date on which a company identifies its shareholders who will receive the bonus shares. If you buy shares before the record date, you'll be eligible to receive bonus shares.
What is an Ex-Bonus Date?
The ex-bonus date is the date when the stock begins trading without the entitlement to the bonus issue. If you buy shares on or after the ex-bonus date, you won't receive bonus shares.
When Do Bonus Shares Get Credited to Demat Account?
Once you're eligible for bonus shares, they are typically credited to your demat account a few weeks after the record date. You'll see these additional shares in your portfolio.
Some Upcoming & Back Date Bonus Issues to look for:
Advantages of Bonus Shares
- Increased Holdings: Bonus shares increase the number of shares you own without any additional investment, potentially boosting your wealth.
- Enhanced Liquidity: Increased trading activity can lead to better market liquidity for the company's stock, making it easier for you to buy or sell shares.
- Positive Signal: Companies often come up with bonus issue of shares when they are confident in their financial health and prospects. This can be seen as a positive signal to investors.
Disadvantages of Bonus Shares
- Dilution: While your shareholding increases in quantity, the percentage ownership of the company remains the same. This dilution may not be ideal for some investors.
- Tax Implications: In some countries, bonus shares may be subject to tax, similar to receiving dividends. You should be aware of your local tax laws.
- Market Perception: In some cases, the market may interpret a bonus issue as a lack of investment opportunities or as a strategy to maintain or boost the stock price artificially.
- Reliance Industries: Reliance Industries issued bonus shares in 2017 in a 1:1 ratio. This decision was seen as a sign of the company's confidence in its future earnings potential.
In conclusion, bonus shares are a fascinating financial tool that can offer advantages to both companies and shareholders. They provide an opportunity to enhance your shareholding without the need for additional capital, all while signaling a company's financial strength and potential for growth. Nevertheless, it's crucial to grasp the potential dilution and tax consequences before investing in stocks that have issued bonus shares. For expert guidance and to take full advantage of these opportunities, consider opening a Demat cum Trading Account and don't forget to download GEPL Pro Markets, our mobile trading app, to stay connected to the market and make informed investment decisions tailored to your unique circumstances. If you're our existing client looking to seize this opportunity to explore bonus shares further, now is the time to invest, click here.
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