In this article, I will tell you what is bonus share? in a simple way.
What is bonus share?
Bonus share basically is nothing but free shares given by the company to its shareholders. generally, bonus share is given in ratio. But bonus shares are available only to those who have invested in the company and who already have some shares of the company. New Bonus Shares are given in proportion to the number of shares previously held by an investor.
Example of bonus share
Let’s take an example An investor holds 1000 shares of Tesla Company, and the company announces to its investors 1 bonus share for every 2 shares available with them. So that investor will get (1000/2)= 500 bonus shares. Due to which the number of shares available with him will increase to 1500 shares.
How to get bonus shares?
When a company announces a bonus share, that time they announce record date and ex-bonus date. The ex-bonus date is 2 days before the record date. If we want bonus shares of the company, then we have to buy the company shares before the ex-bonus date.
Importance of Bonus Shares?
If the company is issuing bonus shares, it means that the company is financially sound. This increases the confidence of the investors in the company and also increases the share price of the company in the long run.
But at the time the bonus shares are issued, the share price of the company decreases. The main reason for this is to increase the supply of shares in the market. When the company issues bonus shares, the share price of the company decreases for some time in the ratio in which the bonus shares were issued at that time. Due to the low price of the share, small investors are also attracted to that stock.
When does the company issue bonus shares?
When the company makes a profit and there is a huge increase in the company’s reserves and surplus, then a company decides to issue bonus shares to its investors. Generally, when the company makes a profit, the company gives a share of profit to its investors by giving dividends, but sometimes the company issues Bonus Share from the remaining part by not paying dividends or giving a little dividend. The issuance of bonus shares increases the share capital of the company.
When the company gives a dividend, it is in the form of cash and is directly added to the bank account of the investors, whereas in the bonus share, the company gives the shares of its own company to the investors so that the capital of the company does not go out anywhere but in the company. It stays the same. By issuing a Bonus Share, the price of the company’s share is reduced, so that more investors can buy that share.
Why does the company issue bonus shares?
When the share price of the company becomes very high then it becomes difficult for a common investor to buy it, so the company issues bonus shares, which reduces the share price, and then a common investor can also buy it easily.
Apart from this, the company also issues bonus shares to increase its share capital, to build a strong image in the market and investors, and to increase liquidity.
TYPES OF BONUS SHARES?
How to find out which companies are going to offer bonus shares now?
If you want to know about a particular company, when that company is going to give bonus shares, then you can take this information from its official website.
But if you want to find out randomly which companies are going to give bonus shares in recent times, which companies are going to declare Bonus Share, then you can easily find this information on Money Control, whose link is given below.
Should I buy shares of a company offering bonus shares?
So see if a company is giving bonus shares, then it means that it is in a financially strong position and is also earning good profits, but there are ups and downs in the business, there is some risk in every business. It is not at all necessary that that company will remain financially strong in future also and will earn a lot of profit, do you know whether its business lags behind Peer Companies?
So do not invest in it just by seeing that such a company is giving bonus shares, first understand its business well, and only if you are satisfied then invest in it.
Advantages of investing in bonus shares?
When the company issues bonus shares, there is no immediate benefit to the investors, but after the issue of bonus shares, in the future, when the company gives dividends, the investors get a lot of profit in the form of dividends.
Let’s understand it with an example
Suppose you have 200 shares of a company Abc and it gives a dividend of Rs 20 per share then you get total of 200×20 = Rs 4,000 as a dividend
But when this company issues bonus shares in 4:1 then now you have total of 1000 shares of this company so now you will get a total of 1000×20 = Rs 20,000 as a dividend which is much higher than before
Let us now talk about what are the benefits when the company issues bonus shares from its reserves.
1.Stock Liquidity Increases – The number of shares increases due to which the liquidity also increases
2.Creates a strong image in the stock market – If a company gives bonus shares, it means that it is earning a good profit, which makes it a strong image in the stock market.
3.Share Capital Increases – On giving bonus shares, the money of the company remains in the company, due to which the share capital of the company increases, whereas on giving cash dividend, that money goes directly to the bank account of the shareholders.
4.Shareholders are encouraged – by giving bonus shares, the shareholders get excited, they feel it as a reward
if you like our explanation of what is bonus share then don’t forget to share it with your friends.