You must have often come across corporate news updates stating that a company you are invested in is offering bonus shares. While it may sound like a reward or free benefit to shareholders, do you know how bonus shares really work and what they mean for your investments? Understanding this concept is important for every stock market participant, as it directly impacts your shareholding and the stock’s market dynamics.
Bonus shares are additional shares issued by a company to its existing shareholders without any additional cost. These shares are given in proportion to the number of shares already held by the shareholder. For example, if a company announces a 1:1 bonus issue, it means shareholders will receive one additional share for every one share they already own.
Bonus shares are issued out of a company’s accumulated earnings or reserves. Rather than paying out the profits as dividends in cash, companies may choose to reward shareholders by issuing bonus shares. This does not involve any outflow of cash from the company’s reserves, but instead converts those reserves into share capital.
The main objective behind issuing bonus shares is to reward shareholders and improve the liquidity of the stock in the market. When the number of shares increases, the price per share usually adjusts accordingly, making the stock more affordable and attractive for retail investors. While the overall value of the investor’s holding remains the same, the number of shares they own increases.
Bonus shares also reflect the financial health and confidence of a company. Issuing bonus shares signals that the company has strong reserves and is optimistic about its future growth. It can also serve as a tool to encourage long-term holding among investors.
It is important to note that while bonus shares increase the number of shares held, they do not increase the overall wealth of shareholders instantly, as the market adjusts the share price in proportion to the bonus ratio. However, over time, if the company continues to perform well, the increased shareholding could result in higher returns in the form of dividends or capital gains.
From an investor’s perspective, bonus shares are tax-free at the time of issuance, but capital gains tax may apply when these shares are eventually sold. Investors should always track the record date and ex-bonus date announced by the company to determine eligibility for receiving bonus shares.
