Bonus shares are extra company shares that are given to existing shareholders as a thank-you for their support and contribution to the expansion of the business. These shares are distributed without charge and in proportion to the shareholder’s holdings of shares.
Companies frequently use bonus shares as a means of rewarding their shareholders, and these shares have several advantages.
What are Bonus Shares
Bonus shares are extra shares that a company freely distributes to its current shareholders. To thank the current shareholders for their support and contribution to the company’s expansion, bonus shares will be issued. It is a means by which the business expresses its gratitude to the shareholders and implores them to hold on to their shares. The shareholders are not required to pay any money upfront to purchase bonus shares. They receive free allocation of the shares.
Benefits of Bonus Shares:
- Liquidity improvement: The shares of a company are made more tradable thanks to bonus shares. There are more shares available for trading when bonus shares are issued because there are more outstanding shares overall. More investors may become interested in the company’s shares as a result of the increased liquidity, which could increase the share price.
- Increased market capitalization: Bonus shares can also increase a company’s market capitalization. The value of all outstanding shares of a company is its market capitalization. The number of outstanding shares rises as a result of bonus share issuance, increasing the company’s market capitalization. This may raise the company’s market value and make it more appealing to investors.
- No dilution of ownership: The ownership of current shareholders is not diminished by the issuance of bonus shares. The number of outstanding shares rises when bonus shares are issued, but the percentage of shares held by each shareholder stays the same. This indicates that the ownership of the business by the current shareholders does not change.
- Benefits concerning taxes: Shareholders may benefit tax-wise from bonus shares. In some nations, the issuance of bonus shares lowers the shareholder’s tax obligation. This is so because getting the bonus shares was essentially free.
- Bonus shares can increase a company’s earnings per share (EPS) (EPS). A company’s net income is divided by the number of outstanding shares to arrive at its EPS. The number of outstanding shares rises when bonus shares are issued, but net income stays the same. This implies that the company’s EPS increases, which may make it more appealing to investors.
- The company’s management may be sending a message of confidence by issuing bonus shares. Bonus shares are a sign that a company’s management is optimistic about the company’s potential for future growth. This may raise the company’s share price and make it more appealing to investors.
- Shareholder retention: Issuing bonus shares can aid in retaining current shareholders. The company can reward its devoted shareholders with bonus shares, which may encourage them to hold onto their shares for longer. This can help to stabilize the stock price of the company and lessen market turbulence.
In conclusion, bonus shares are a well-liked method for businesses to express gratitude to their shareholders for their support and contribution to the expansion of the business. One can also take advantage of the benefits of multiple demat account as they can help in investing through multiple different accounts. Numerous advantages come with bonus shares, such as improved market capitalization and increased liquidity.