In this article, let us learn about the bonus share issue. Bonus issues are the additional shares given to the current shareholders without any additional cost. It is based upon the number of shares that a shareholder owns. The company’s acquired profits are not given out in the form of dividends but are converted into free shares. The share price will be divided as per the ratio to maintain balance and the face value will be the same as before.
Let us take an example if an Investor holds 100 shares of a company and a company declares a 1:1 bonus, that is for every single share, he gets 1 share for free. A total of 100 shares for free and his total holding will increase to 200 shares. If the price of share was 200 rs before bonus issue last date, the next day price will also adjust accordingly to bonus issue ratio , example 100rs in this case. So basically a person will have 200 share of 100rs each instead of 100 share of 200 each. However , the face value of all his shares will remain same. (unlike stock split where face value falls)
The bonus shares are issued to increase the company’s equity base. It is difficult for new investors to buy shares if the price is high in that particular company. An increase in the number of shares will reduce the price per share. The overall capital remains the same even if the bonus shares are listed.
Advantages of bonus issues
- Issuing bonus shares helps to increase the issued share capital of the company.
- It takes more money from the cash reserve than issuing dividends does.
Disadvantages of bonus issues
- Dividends should be paid according to the number of shares increased.
- Over capitalization may appear due to the issues.
- It encourages to speculate the stock.