Why Company issue bonus shares to shareholders, Good or bad for investors

 Concept of bonus shares:

Is it good to invest into the companies those issue bonus shares to their shareholder?

Today we will discuss this topic in detail and in very easy way. But before we discuss above topic we have start from the basics.

We all must have heard about bonus shares in the stock market, but there will be many investors who do not know what bonus shares are and why companies issue bonus shares to their investors. In today's topic, we will understand in very simple words why listed companies issue bonus shares in the stock market. What are the benefits of issuing bonus shares to companies and what are the benefits of bonus shares to investors.

Let us first understand that

  Question:

What are bonus shares?

Answer: When companies get extra profit from their business, then the management of the company keeps a part of the capital of that profit safe in its reserve and surplus. Now these reserves and surpluses are either used by the companies to expand the business of the company, or in future out of these reserves and surpluses, the companies issue additional shares to their investors. These additional shares issued are called bonus shares.

Question:

Does the issue of bonus shares change the net worth of the company in any way?

Answer:

Let us tell you that there is no change in the net worth of the company by issuing bonus shares. Simply speaking, bonus shares are absolutely free.

Question:

Do companies issue bonus shares every year?

Answer:

No company issues bonus shares every year. The company issues bonus shares only when the performance of the company is going on very well and when the reserve and surplus with the company have also increased a lot. Along with this, when the company management feels that the share price has also increased, then in the situation, bonus shares are issued to increase the share capital of the company and reduce the share price.

 

Question:

What can be the ratio of bonus shares?

Answer:

The ratio of bonus shares depends on the decision of the management of any company that in what ratio it wants to issue bonus shares to the investors of its company. If explained in simple words, new bonus shares are issued by the company in proportion to the number of shares already held by the investor. Let us understand the ratio of bonus shares with an example.

Example of Bonus Shares Ratio:

  1)Example, suppose an investor holds 100 shares of Company ABC and the company announces 1 bonus share for every two shares held. So in this case the bonus share ratio is (1:2 ratio) i.e. the investor will get 50 (100/2) bonus shares taking the total number of shares to 150.

2) Example:

If the company has kept the ratio of bonus shares as 2:1, then the shareholder gets 2 more shares for every 1 share held. In simple words, if the investor has 100 shares, he will get a total of 200 and the total number of shares will be 300.

Question:

What is the record date of Bonus Shares?

Answer:

A cut-off date set by the company is called the record date. During this, the management of the company identifies all the shareholders who are eligible for the bonus shares. On this date, the bonus shares are given to all the shareholders who hold the shares of the company. In simple words, it is the date on which the bonus is announced by the company. If an investor has bought shares of that company before this date, then only that investor will be given bonus shares. Keep in mind that it is mandatory for all investors to have shares of that company in their demat account, in proportion to which the company issues bonus shares.

Question:

What are the benefits to the investors from the issue of bonus shares?

Answer:

Speaking in simple words, it is a matter of happiness for the investors to get bonus shares and when the company announces bonus shares, it has been seen that there is a huge jump in the share price of that company. One advantage is to get bonus shares. It happens that the number of shares of the investor increases. On the other hand, whenever the company declares dividend in future, the investor can make more profit due to bonus shares, because dividend is given per share. Therefore, if the number of shares is more, then the dividend will also be more, along with this, the issue of bonus shares reduces the share price and this increases the liquidity of the company's stock in the stock market and increases the confidence of the investors in the company.

Question:

Should I invest in companies that give high bonus? What are the advantages and disadvantages of bonus shares?

Answer:

There are also some investors in the stock market who do not like to invest in companies that give high bonuses, because they believe that if companies are giving more of their reserves and surpluses to their shareholders, then the company will not be able to expand. Not thinking about Therefore, if the company does not do expansion, then there will be no growth of the company in future. To some extent, this thinking may also be correct. If we check the past data of some government companies, then we will come to know that the stocks of government companies have given bonus shares and dividends to their share holders. These companies have not increased the wealth of their share holders, for which investors are investing in the stock market. But for those investors who want to make safe investment, it is better to invest in companies that give more bonuses.

In nutshell, we hope that today's topic will be beneficial for all the investors because there is a question in the heart of many investors that why does the company issue bonus shares and what benefit does it give them?  Should investors invest in companies giving high bonus or not?  So we hope that many doubts of the investors would have been cleared by today's topic.