Bonus shares are extra shares that a corporation issues to current shareholders based on the number of shares they possess. Bonus shares are distributed to shareholders at no expense to them. Let’s take a look at what are bonus shares and why do firms offer them?
Why Do Businesses Issue Bonus Stock?
Bonus shares are issued by a firm when it is unable to pay a dividend to its shareholders owing to a cash deficit despite having made a profit for the quarter. In this case, instead of paying dividends, the corporation gives bonus shares to current owners. These shares are distributed to current shareholders based on their present stake in the firm. It’s also possible to give current owners bonus shares.
Benefits Of Bonus Shares
Here is a list of some of the benefits of bonus shares:
- Investors do not have to pay any tax on bonus shares they receive.
- It benefits the company’s long-term owners who desire to enhance their investment.
- Bonus shares increase investors’ confidence in the company’s operations since the money is utilised to expand the firm.
- The investor will get a bigger payout when the firm announces a dividend in the future since he now owns a larger number of shares in the company thanks to bonus shares.
- Bonus shares signal to the market that the firm is dedicated to a long-term growth strategy.
- Bonus shares increase the number of outstanding shares, which improves the stock’s liquidity.
The process for the implication of the bonus shares
- Bonus share issuance has ramifications: A bonus share issuance is a business activity taken to overhaul a company’s current cash reserve. It brings the company’s employed capital in line with its issued capital.
- A company’s employed capit
- al grows when it produces a profit. Increases in issued shares, also known as issued capital, are used to disperse the surplus.
- A bonus share issue has no effect on a company’s net assets because there is no cash flow involved. It simply signifies that the company’s share capital (the number of shares issued) has risen.
- The influence of the bonus share issue on Earnings per Share (EPS), which is computed by dividing a company’s net profit by the number of shares owned. A fall in EPS, on the other hand, is compensated.
To divide its accumulated earnings, a corporation might offer bonus shares to its owners. Bonus offerings not only promote retail involvement in a company’s shares, but they also improve its equity base. If the corporation announces a bonus issue, you will benefit as an investor. A Demat Account is required before you can begin investing in business shares. Opening a Demat Account with a reputable financial partner like Sharekhan may bring a host of advantages, including no annual management charges, easy trading platforms, and aggregated market research reports. You can also connect with them to understand about the benefits of having multiple demat accounts. These bonus shares can help you earn better dividends without investing a single penny on them.