‘What is bonus share?’ or the word ‘Bonus Shares’ frequently appears in the financial and investment sector, leaving many unsure of what they are and how they work. We will go further into the idea of bonus shares in this article, illuminating their importance and financial ramifications.
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What is Bonus Share?
Bonus shares, also known as scrip dividends or capitalization issues, are additional shares distributed by a company to its existing shareholders. These shares are allotted free of cost and are in proportion to the number of shares held by each shareholder. In essence, bonus shares are like a sweet reward for loyal investors.
In other words, A Bonus share is extra share that is issued to current owners at no additional cost based on how many shares they currently possess. These are the company’s accumulated earnings that are converted into free shares rather than being distributed as dividends.
Basic Ideas behind Bonus Shares
The fundamental idea underlying bonus shares is that the number of shares outstanding increases while maintaining a fixed ratio between shares held and outstanding shares. For instance, if Investor A owns 200 shares of a corporation and the company announces a 4:1 incentive, he will receive 4 additional shares for free for every share he owns. His overall stake will rise to 1,000 shares after receiving a total of 800 shares for free.
How to get bonus shares
In 3 simple steps you will earn bonus shares
- Open a free Demat Account
- Start investing in Share market
- Invest in the company that offers bonus shares
- You will get bonus shares in 60 days from ex-date
The Mechanism for Issuing Bonus Shares
Bonus shares are issued through a reasonably simple method. Let’s dissect it step-by-step:
Reserve Accumulation: Over time, the business accrues profits, which are later designated for distribution as bonus shares.
Board Approval: The issuing of bonus shares is subject to approval by the board of directors of the Company.
Record Date: A record date that establishes which shareholders are qualified to receive bonus shares is made public. The bonus is only valid for stockholders on file as of this date.
The bonus shares are paid to present owners in proportion to their current holdings, according to the principle of proportionate distribution. For instance, if the corporation grants a 1:1 bonus and you now own 100 shares, you will also receive 100 additional shares.
Bonus Shares & Tax Implications
Receiving bonus shares is typically regarded by tax authorities as a non-taxable event for shareholders. However, depending on the local tax regulations and the length of holding, capital gains tax may be applicable when these bonus shares are eventually sold.
Bonus Shares vs Stock Splits
Bonus Shares:-
A company’s additional shares that are given away free to its current shareholders are referred to as bonus shares, also referred to as scrip dividends or capitalization issues. Those shares are distributed in proportion to how many shares each shareholder owns.
The purpose of bonus shares is to reward devoted shareholders while taking advantage of accrued earnings. It is a non-cash technique of profit sharing.
Impact on shareholders: There is no financial outflow because shareholders receive more shares. However, because the stock price correspondingly declines following the issuance, the overall value of their holdings stays the same.
For instance, if you now own 100 shares and the firm grants a 1:1 bonus, you will receive 100 additional shares; nevertheless, the stock price will be halved to preserve the same market capitalization.
Stock Splits:-
Stock Splits: To increase the total number of outstanding shares, stock splits include dividing current shares into a number of new shares. The company’s market capitalisation remains unaffected by this.
In order to lower the nominal share price and make the stock more accessible to a wider variety of investors, stock splits are frequently performed. Liquidity may also be improved.
Shareholders are given more shares, but the value of their entire investment is unaffected. In a 2-for-1 stock split, for instance, 200 shares would be issued to you at a price of $50 each if you had 100 shares valued at $100 each before to the split.
Example: If a company with a stock trading at $100 per share decides on a 2-for-1 split, each shareholder receives an additional share for every share they own, and the stock price is halved to $50.
In conclusion, the goals of both bonus shares and stock splits are to increase liquidity and reward current shareholders. They do this, though, in a little bit of a different way. Stock splits increase the number of shares without changing the overall value of an investment, whereas bonus shares give shareholders extra shares as a reward. The company’s goals and the desired influence on the stock’s trading characteristics determine which of the two tactics should be used.
Some Bonus Shares’ names
Final Lines
In conclusion, firms use bonus shares as a strategic tool to reward its devoted shareholders, increase liquidity, and draw in new investors. Investors can be empowered to make wise judgements in the constantly changing financial world by being aware of the mechanics and implications of bonus share issue.
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