What are Bonus Shares
Bonus shares are additional number of shares given by the company to its existing shareholders on the basis of shares owned by them in the form of “BONUS” or we can say free of cost. Shareholders can transact these shares in the secondary market to meet the liquidity.
Only a company has the right to issue bonus shares to their shareholders, which has earned a massive profit that cannot be utilized for any particular purpose and can be distributed as dividends. However, these bonus shares are given to the shareholders according to their stake in the company.
Why companies issue bonus shares?
Bonus shares are issued by a company when the company fail to pay dividend to its shareholders due to shortage of funds in spite of earning good profits for that quarter. In such type of situations company issues bonus shares to its existing shareholders instead of paying dividend to them.
How to calculate Bonus Shares?
The bonus shares are given to the shareholders according to their existing stake in the company. For example: a company is declaring one for two bonuses shares which means that an existing shareholders will get one bonus share of the company for every two shares held. Suppose a shareholders hold 1,000 shares of the company. Now when the company issue bonus shares, he/she will get 500 bonus shares (1000*1/2=500).
There are some important terms related to the bonus issue are given below-
• Record Date- Record date is set by the company as cut-off date. The record date is used by the company to find the eligible shareholders to distribute bonus shares. If you are the owner of the company then on this cut-off date you are eligible to receive the bonus shares.
Advantages of Bonus Shares
• No need to pay tax on receiving bonus shares.
• Suitable for Long-term shareholders of the company who wants to increase their investment.
• Enhance the faith of the investors in company operations.
• Bonus shares indicate a positive sign for the company in long term growth.
• Increase outstanding shares helps to increase the liquidity of the stock.
• Company issues bonus shares at free of cost to shareholders.
Disadvantages of Bonus Shares
• For Investors- Profit will remain the same but the number of shares will increase as the earning per share will fall.
• For Company-
1.The company do not receive any cash while issuing bonus shares to shareholders.
2. The companies have extra free-floating shares with the issue of bonus shares in the market.
3. Issue of Bonus share benefits companies to get themselves out of the situation where they are not able to pay cash dividends to their shareholders.