Unlocking the Power of Bonus Shares: How They Work in 2024

Before getting to know The Power of Bonus Shares, we will get an understanding of What is Bonus Shares and How do we get Bonus Shares ?

In this blog we will be discussing What is Bonus Shares . Also, How do they work for us.

1 What are Bonus Shares ?
2 Understanding Bonus Shares
3 Why do Companies offer Bonus Share ?
4 Types of Bonus Shares
5 What is the eligibility for getting Bonus Share ?
6 What is Record Date ?
7 Pros and Cons of Bonus Shares
8 Difference between Bonus Share and Stock Split
9 Conclusion: Bonus Shares

What are Bonus Shares ?

Bonus shares are additional shares that a company gives to its current shareholders without any cost. Think of it as a reward for owning shares in the company. Instead of paying out cash dividends from its profits, the company decides to distribute these extra shares. For example, if you own 100 shares and the company issues bonus shares at a 1:1 ratio, you’ll get 100 more shares, doubling your total to 200 shares.

This doesn’t change the value of your investment right away because the share price typically adjusts after the bonus shares are issued. However, it can be a good thing in the long run because it increases the number of shares you own. It’s the company’s way of sharing its success with you without spending its cash reserves.

Also, I have mentioned Wikipedia link of Bonus S hares.

Understanding Bonus Shares

Bonus shares are like a company’s way of saying “thank you” to its shareholders. Instead of giving out extra cash, the company gives you more shares for free. Here’s how it works in simple terms:

When a company makes a good profit but wants to keep the cash for future projects or to strengthen its finances, it might decide to issue bonus shares. For example, if you own 50 shares and the company declares a 2:1 bonus, you’ll get two extra shares for every share you already own. So, you’d end up with 150 shares instead of 50.

The overall value of your investment remains the same initially because the share price adjusts to account for the new shares. But owning more shares can be beneficial in the long run, especially if the company continues to grow. It’s a way for companies to reward you for your loyalty without spending any of its cash reserves.

Why do Companies offer Bonus Share ?

Companies utilize reward offers to compensate their shareholders or maybe than investing cash. undefined

Rewarding Stockholders: Reward offers serve as a way of saying thank you. For this reason, instep of paying cash profits, the enterprise rewards your bolster and venture with more stocks.

Enhancing Liquidity: Reward offers increment the generally number of offers that are freely accessible inside the enterprise. This regularly diminishes the firm’s stock cost and permits the simple offering and acquiring of stocks, which can pull in more investors.

Increasing Financial specialist Certainty: Reward offers work as a way that a organization illustrates its surety of the company’s future. It appears that the company has been productive and is looking to reinvest in growth.

Retaining Benefits: Alternatively, the company might want to use the cash for expansion, for future needs, or investment, or to increase the cash flow from operating cash rather than providing benefits in terms of cash earnings. This influences the manner in which the business expands alongside the continued remuneration of investors.

In conclusion, the promotion of a reward offer is a significant stage that will benefit the business and its shareholders, make the advertisement more reliable while enhancing its future opportunities.

Types of Bonus Shares

Bonus share are surplus shares that a business offers to its current stockholders at no further expense. Bonus shares can be classified according to how and why they are granted, even though they all function essentially in the same way. This is a brief explanation:

Fully Paid Bonus Share:
These are the most usual bonus shares prevalent in the market even today. The company uses its earnings or reserves that have accumulated to float these shares in the market. If you get fully paid bonus shares, this will imply that the amount was realized from within the company and you get the shares without paying for them.

Partly Paid Bonus Share:
These shares are limited relative to the preceding shares. Partly paid bonus shares involve the issue of shares that are partially paid for by the buyer. While you are a shareholder, you would have to make the other balance amount when the company demands it. This makes it possible for you to acquire the shares at a lower price than you would otherwise afford in the market hence bearing some cost though considerably small.

Shares Issued from Reserves:
Sometimes, companies issue bonus shares by converting different types of reserves (like capital reserves) into share capital. This is a way for the company to restructure its finances while rewarding shareholders.

In simple terms, most bonus shares are fully paid and free for shareholders, but there are a few cases where you might need to pay a small amount later. The goal of all bonus shares is to increase your investment in the company without requiring you to spend more money upfront.

What is the eligibility for getting Bonus Share ?

You have to meet certain conditions prescribed by the company in an effort to receive reward options.

Should be a share holder:
To begin with, you must be an interested party that owns stock in the business or company in question. This implies that you must own at least one share of the company’s stock sometime before the record date, which is the date the company establishes to determine who will be eligible to receive the reward shares.

Holding Offers on the Record Date:
The record date is pivotal. There are some conditions that must be met before the issuance of bonus shares and they are set by the corporation. undefined

Being a Shareholder: First of all, you have to be an owner of the company’s shares to be able to be an insider. This means that to qualify for the bonus shares, one must own at least one share of the business’s stocks before the record date which is a date set by the firm.

Keeping Shares on the Record Date: This is a crucial factor that should not be forgotten. To be eligible for bonus shares, you must hold the company’s shares on this specific date. If you buy shares after the record date, you won’t qualify for the bonus shares, even if you hold them for a long time afterward.

Ex-Date Awareness:
The ex-date is usually one or two days before the record date. If you buy shares on or after the ex-date, you won’t be eligible for the bonus shares. It’s important to buy the shares before the ex-date to ensure you’re on the shareholder list by the record date.

For a layman, this means, to obtain bonus shares, one must be an investor in the particular company’s stock and must hold the stock on the record date fixed by the company for this purpose. Subject to these conditions, the bonus shares will be credited to your account at no additional cost.

What is Record Date ?

A firm uses the record date as a crucial tool to identify which shareholders are entitled to dividends, bonus shares, and other payouts. Here’s a simple breakdown:

The record date is like a snapshot of the company’s shareholder list. On this specific day, the company checks its records to see who owns shares. If you’re listed as a shareholder on the record date, you’ll qualify for the bonus shares or other benefits the company is offering.

For example, if a company announces a bonus share issue, they’ll also announce a record date. To be eligible for those bonus shares, you need to own the company’s shares before the record date. If you buy shares after the record date, you won’t be included in that “snapshot,” so you won’t receive the bonus shares.

In other words, the record date may be termed as the date or deadline beyond which the shareholders can no longer be entitled to certain privileges which the company may be offering to its shareholders. To receive these benefits, ensure you own the shares before this date.

Pros and Cons of Bonus Shares

Pros of Bonus Shares

Free Shares: No cash outlay is involved to go for additional shares. It is an added incentive that shareholders can benefit from, as their decision to invest in the company is valued by the business.

Increased Ownership: A reader could receive more advantages because the scenario is as follows: When the business starts making good revenues and the share price rises high, you would own more total shares and therefore the total profit would be generated.

Booster of Confidence: Sharing of bonus shares is common with companies that are financially sound. This may help in attracting more investors as well as boosting your morale as an investor.

Easier Trading : Having more shares available for sale facilitates acquisition and sale of the shares, and can stimulate activity in the shares market and the overall appeal of the shares you are offering to other investors.

Tax Benefits: Unlike dividends, which are subject to taxation at source, bonus shares are only subject to tax when you dispose them. This can be a tax advantaged method of making your investment grow.

Cons of Bonus Shares

Lower Share Price: Even though you get more shares, the overall value of your investment doesn’t change immediately because the share price usually drops after bonus shares are issued.

No Immediate Cash: Bonus shares don’t give you instant cash like dividends do. The benefit comes later if the share price increases over time.

Possible Overvaluation: If a company keeps issuing bonus shares, it can end up with too many shares in the market, which might reduce the earnings per share and make the stock less appealing.

Smaller Dividends: With more shares in circulation, the amount of dividend you get per share might go down if the company doesn’t increase its overall payout.

Less Control: If you’re a major shareholder, bonus shares can dilute your ownership percentage, meaning you might have less influence over company decisions unless you buy more shares.

In short, bonus shares can be a nice perk that increases your shareholding without extra cost, but they also have potential downsides like a lower share price and smaller dividends. Whether they’re a good or bad thing depends on your goals and how the company performs in the future.

Difference between Bonus Share and Stock Split

Here’s a simple table comparing bonus shares and stock splits:

Aspect	Bonus Shares	Stock Split
Definition	Additional shares that are usually from reserves or earnings and provided to the shareholders for free	split of existing shares into many shares raising the number of shares to the total figure.
Purpose	To reward shareholders and improve liquidity without spending cash.	To make shares more affordable and increase trading volume.
Shareholder Impact	Shareholders receive extra shares, but the overall value remains the same initially.	Shareholders get more shares, but the overall value of their investment remains the same initially.
Share Price Effect	Share price usually drops proportionally to the increase in the number of shares.	Share price is adjusted downward based on the split ratio (e.g., a 2-for-1 split halves the price).
Effect on Ownership	Ownership percentage remains the same, but the number of shares increases.	Ownership percentage remains the same, but the number of shares increases.
Dividend Impact	Dividends per share may decrease if the total dividend payout doesn’t increase.	Dividends per share decrease proportionally, but total dividend income stays the same if the payout is unchanged.
Financial Impact	Does not affect the company’s financial position; it’s an internal reallocation of equity.	Does not affect the company’s financial position; it’s a change in share structure.

Difference between Bonus Share and Stock Split

In conclusion, bonus shares and stock splits both result in an increase in the total number of shares owned though their aim differs. Bonus shares originate from the profit of the company; on the other hand stock split changes the price per share so that it is easily negotiable.

Conclusion: Bonus Shares

Stay updated with news on upcoming bonus share issues to buy shares of promising companies before the ex-date. This approach can help you diversify your portfolio and grow your investments efficiently, all without additional cost.

In this blog, we have provided information about-

“What are Bonus Shares?, Understanding Bonus Shares., Why do companies offer Bonus Share ? Types of Bonus Shares, What is the eligibility for getting Bonus Share? , What is Record Date ?, Pros and Cons of Bonus Shares, Difference between Bonus Share and Stock Split”

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