Bonus Share
A bonus share is a type of stock issue by a company where existing shareholders are given additional shares, usually without paying anything extra, in proportion to their existing holdings. The issuing of bonus shares increases the number of outstanding shares in the market, which leads to a dilution of the ownership of each existing shareholder. The purpose of issuing bonus shares is usually to reward long-term shareholders and to improve liquidity in the stock market.
However, it's important to note that while the number of shares increases, the total value of a shareholder's investment remains unchanged. Additionally, the issuance of bonus shares does not necessarily indicate a company's financial health, and it is important to consider other factors such as revenue, profits, and future prospects before making an investment decision.
Types of Bonus Share
A bonus share is a type of stock dividend that a company issues to its shareholders, usually in proportion to the number of shares they already own. There are two main types of bonus shares:
1. Stock dividend (or stock split) - A company increases the number of its outstanding shares by issuing additional shares to existing shareholders. This has the effect of reducing the value of each individual share but does not change the overall value of the company.
2. Bonus issue (or scrip issue) - A company issues new shares to existing shareholders, without increasing the overall number of outstanding shares. This has the effect of increasing the value of each individual share but does not change the overall value of the company.
Both types of bonus shares can benefit shareholders by increasing their overall ownership stake in the company and may also signal the company's confidence in its future prospects.
How do they Work?
When a company decides to issue bonus shares, it typically takes the following steps:
1. Board of directors approval - The board of directors must approve the decision to issue bonus shares.
2. Capital adjustment - The company adjusts its capital structure by increasing the number of outstanding shares. In the case of a stock dividend or stock split, this involves creating new shares. In the case of a bonus issue, this involves issuing new shares without increasing the overall number of outstanding shares.
3. Allotment of bonus shares - The newly issued shares are then allocated to existing shareholders in proportion to the number of shares they already own.
4. Record date - A record date is set, on which the company identifies which shareholders are eligible to receive the bonus shares.
5. Credit of bonus shares - The bonus shares are then credited to the eligible shareholders' brokerage accounts.
Once the bonus shares have been issued and credited to shareholders, they become just like any other shares and can be traded, sold, or held in the same way. It's important to note that bonus shares are not a form of compensation or payment, and do not generate any immediate cash flows for shareholders.
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