Table of Contents
Advantages of Bonus Shares for Investors
Bonus Shares – Frequently Asked Questions
Who is Eligible for Bonus Shares?
How are Bonus Shares credited?
What are the advantages and disadvantages of Bonus Shares?
How are Bonus Shares different from Stock Splits?
What is the benefit of issuing Bonus Shares?
Is dividend paid on Bonus Shares?
When should I buy Bonus Shares?
What is the eligibility for getting Bonus Shares?
Bonus shares are a common phenomenon in the corporate world that often raises questions among shareholders and investors. It refers to additional shares that a company issues to its existing shareholders, free of cost. These are distributed proportionally to the shares and dividends held by each shareholder. Such shares serve as an alternative to cash dividends when a company is unable to pay dividends due to a shortage of liquid funds or to avoid dividend distribution taxes.
It is important to carefully evaluate the specifics of each share offering and consider them in the context of one’s investment goals and risk tolerance. Know about the advantages of these shares for investors, and get answers to some frequently asked questions about these types of shares.
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Advantages of Bonus Shares for Investors
These shares offer several advantages for investors, making them an attractive option to consider. Find out about some of the key benefits:
- Tax Advantage: One of the significant advantages of bonus shares is that they are not subject to taxes. Unlike dividends, which are taxable at a rate of 30% for investors, these shares do not attract any tax liability. This tax efficiency can result in higher overall returns for investors.
- Increased Dividends: Such shares can lead to higher dividend payments for shareholders. When a company issues these shares, the total number of outstanding shares increases. As a result, the company’s profits are divided among a larger number of shares, potentially leading to higher dividend payouts per share. This increase in dividends can boost the overall income generated from the investment.
- Capital Appreciation: These shares can also contribute to capital appreciation for investors. When a company issues such shares, it indicates the company’s confidence in its future growth prospects. The increased number of shares in the market can attract more investors and increase demand for the stock. This increased demand can potentially drive up the share price over time, leading to capital gains for investors.
- Enhanced Accessibility and Affordability: By issuing such shares, companies increase the total number of shares available in the market. This increased liquidity makes it easier for investors to buy and sell shares. Furthermore, the provision of more shares reduces the share price, making them more affordable to a wider range of investors. This increased accessibility and affordability can attract more investors to the stock, leading to greater market participation.
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Bonus Shares – Frequently Asked Questions
Here, we will answer some frequently asked questions about bonus shares to help you understand their significance and implications.
Who is Eligible for Bonus Shares?
These are additional shares distributed to existing shareholders by a company, typically in proportion to their current shareholdings, as a way to reward investors and enhance shareholder value.
Shareholders who own shares of a company before the record date and ex-date set by the company are eligible to receive bonus shares. In India, the T+2 rolling system is followed, where the ex-date is two days before the record date. It is important to purchase shares before the ex-date to be eligible for bonus shares.
How are Bonus Shares credited?
These are typically credited to shareholders’ DEMAT accounts within fifteen days after the new International Securities Identification Number (ISIN) is allotted for the shares. The shares are allocated free of cost as additional shares to the shareholders.
What are the advantages and disadvantages of Bonus Shares?
On the positive side, these increase the issued share capital of the company, making it more attractive to investors. Shareholders receive additional shares, which can provide extra income. Furthermore, these shares lower the price per share, making them more affordable for potential investors.
However, there are drawbacks to issuing these shares as well. It is costlier for the company compared to declaring cash dividends, as the shares are issued from the capital reserve. The issuance of such shares also reduces the income per share, which might disappoint investors and make the stock less attractive. Shareholders may sell the additional shares to meet liquidity needs, leading to a decrease in their percentage ownership in the company.
How are Bonus Shares different from Stock Splits?
Although these may seem similar, they have distinct differences. A stock split is another method used by companies to increase the number of shares trading in the market. A stock split does not involve any cost, and the company’s cash reserve remains intact. Bonus shares, on the other hand, are issued from the capital reserve.
What is the benefit of issuing Bonus Shares?
Issuing these shares benefits both the company and its shareholders. For the company, it allows them to avoid paying cash dividends when facing liquidity issues. By increasing the number of equity shares in the market, bonus shares make the company more appealing to investors. Additionally, the lower share price resulting from these shares makes them more affordable to potential investors.
Is dividend paid on Bonus Shares?
Dividend payment on these shares depends on the total number of shares held in a shareholder’s DEMAT account. When a company declares a dividend, it does not differentiate between rights issues or bonus share. These shares offer several advantages to investors. They are not subject to taxation, and long-term investors can benefit from the increase in share prices over time.
Furthermore, when the company distributes dividends, shareholders receive a higher dividend amount based on the total number of shares held, including bonus share. These shares also indicate the company’s commitment to long-term success, which can positively influence market perception.
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When should I buy Bonus Shares?
To be eligible for these shares, it is crucial to consider two dates: the record date and the ex-date. The record date is the cutoff date set by the company, and shareholders on that date become eligible to receive bonus shares. The ex-date is usually one day before the record date. In India, with the T+2 settlement process, shares bought on the ex-date will not be credited to the account by the record date. Therefore, to qualify for bonus shares, shares must be purchased before the ex-date.
What is the eligibility for getting Bonus Shares?
All existing shareholders before the record date and ex-date are eligible to receive these shares. In India, following the T+2 rolling system, shares must be purchased before the ex-date to qualify for such shares.
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Conclusion
Bonus shares are an attractive proposition for shareholders and investors, providing additional shares free of cost. They have advantages such as increased share capital, additional income, and affordability. However, issuing these shares also has disadvantages, including costliness for the company and potential dilution of ownership. Understanding the concept of these shares and their implications can help investors make informed decisions about their investment portfolios.
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