Before you begin your investing adventure as a new-age investor, you must understand the principles of the share market. You must understand the main principles of equity markets in addition to having a knowledge of market mechanics.
Understanding about corporate actions, which are actions performed by firms listed on the stock exchange, including bonus shares, stock splits, and so on, is one such important element.
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What is Bonus Share?
Bonus shares are additional shares that are provided to Current owners at no cost, depending on the amount of shares that a stakeholder holds.
These are the firm’s accumulated income that are convertible into free stocks rather than being distributed as dividends.
The essential idea behind bonus shares is that the total quantity of stocks rises with a constant ratio of held stocks to outstanding stocks.
Example of bonus shares meaning
bonus share meaning : If Investor X owns 2000 stocks of a firm and the company announces a 2:1 incentive, he will receive four additional shares for free. That’s a total of 4000 stocks for free, bringing his total holdings to 6000.
Why bonus shares are issued?
Bonus shares are issued by firms to promote retail involvement and grow their stock base. When a firm’s price per share is high, it becomes challenging for new investors to purchase shares in that firm. The price per share decreases as the number of stocks increases
Record Date
The firm’s record date is a cut-off date. If you hold stocks in the firm at the time of the cut-off date, you are entitled to earn bonus shares. The firm sets the record date in order to identify qualified shareholders and issue bonus stocks to them.
Advantages of Bonus Shares
- Investors do not have to pay any tax on bonus shares they receive.
- It benefits the company’s long-term owners who wish to expand their investment.
- Bonus shares increase investors’ confidence in the firm ‘s performance since the money is utilised to expand the firm.
- The investor will get a bigger payout when the business announces a dividend in the future since he now owns a larger number of stocks in the firm owing to bonus shares.
- Bonus shares provide a good message to the market, indicating that the firm is dedicated to a long-term growth strategy.
- Bonus shares enhance the number of outstanding shares, which improves the stock’s liquidity.
Disadvantages of Bonus share
- The cash reserve is reduced more when bonus shares are issued than when dividends are paid.
- Furthermore, because issuing bonus stocks does not create income for the firm, it may lead to a future decrease in dividends per share, which shareholders may not like.
- When shareholders sell bonus shares to fulfil liquidity demands, their percentage investment in the firm is reduced, giving them less influence over how the firm is operated
Guidelines for Company
Before issuing bonuses, the firm must agree to the following guidelines:
- Bonus shares must be provided for in the firm ‘s Articles of Association (AoA).
- A resolution authorising the issuance of bonus shares must be approved by the company’s annual general meeting.
- The stock exchange should be notified of the upcoming bonus share issuance, which must be proposed by the board of directors and subsequently approved by the shareholders.
- If the bonus is being awarded to non-resident Indians (NRIs), approval from the Reserve Bank of India is necessary (RBI).
- Before issuing bonuses, the firm must meet with the Securities Exchange Board of India‘s (SEBI) strict specifications.
- The business can only issue fully paid-up stocks as a bonus issue, according to the rules.
Note:
Permission from the individual financial institution is necessary if the firm has taken out borrowing.
Difference between Bonus Share & Stock Split
There are numerous parallels and contrasts between stock splits and bonus shares. When a business declares a stock split, the number of stocks issued rises, but the value of the investment stays the same.
Companies usually proclaim a stock split to offer greater liquidity to their securities, increase the number of shares available for trading, and make shares more accessible to individual investors.
There is no gain or decrease in the firm’s cash reserves when a stock is divided. When a firm distributes bonus shares, however, the shares are paid for with cash reserves, which reduces the reserves.
Conclusion
As a result, a firm might issue bonus shares to its stakeholders in order to distribute its accumulated profits. Bonus issues not only improve a company’s equity basis, but they also boost retail involvement in its stock. If the firm announces a bonus issue, you will benefit as an investor.
This is all from our side regarding What is Bonus share? Although, if you have any doubts about bonus share meaning you can just comment below.
Other Interesting blogs related to What is Bonus share:
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FAQ About bonus shares meaning
Types of bonus shares?
Fully paid Bonus shares & Partly paid Bonus shares are two types of Bonus shares.
Why bonus shares are issued?
When firms are low on cash and stakeholders seek a regular income, bonus issues are issued to shareholders. The bonus shares can be sold by shareholders to fulfil their cash requirements. Bonus stocks may also be issued to help the firm build its reserves.
What is Bonus Share in Hindi?
बोनस शेयर अतिरिक्त शेयर होते हैं जो वर्तमान मालिकों को बिना किसी कीमत के प्रदान किए जाते हैं, जो एक हितधारक के शेयरों की मात्रा पर निर्भर करता है। ये फर्म की संचित आय हैं जो लाभांश के रूप में वितरित किए जाने के बजाय मुक्त स्टॉक में परिवर्तनीय हैं।
Advantages of bonus shares?
The Major advantages of bonus shares are Investors do not have to pay any tax on bonus shares they receive.It benefits the company’s long-term owners who wish to expand their investment.
Bonus shares are issued to which type of shareholders
Bonus shares are just issued to equity shareholders.
