If you watch or read stock market news, you must have heard the term bonus shares. It often seems as if the company is giving something to its investors for free. But the question is, is bonus share really a free gift, or is there a special strategy hidden behind it? Let us understand it in very simple language.
What are bonus shares?
Bonus shares are those additional shares which a company gives to its existing shareholders without paying any money. That is, if you already have shares of that company, then the company gives you some more shares in exchange for the same. For example, if you have 100 shares and the company announces a 1:1 bonus, you will get 100 more shares. Now you will have a total of 200 shares, without spending a single rupee.
Is it really beneficial for investors?
At first glance, after receiving bonus shares it seems that your wealth has increased. The number of shares increases, but the thing to note is that your total investment value does not increase at the same time. This happens because the share price automatically decreases after the bonus is issued. That means more shares are acquired, but the price per share decreases. Overall the value of your holding remains approximately the same.
Why do companies issue bonus shares?
When a company has good earnings and has accumulated strong reserves, then it decides to give bonus shares. Many times, instead of giving cash dividend, the company wants to provide benefits to investors in the form of shares. With this, the company’s cash also remains safe and the shareholders also get satisfaction. Bonus shares also show that the company is confident about its future.
What is the mathematics behind bonus shares?
An important reason behind issuing bonus shares is to balance the share price. When a company’s shares become very expensive, it becomes difficult for small investors to buy them. After the bonus, the share price reduces, due to which more people are able to invest in it. This increases the buying and selling of shares in the market and improves liquidity.
How do investors benefit in the long run?
Although bonus shares do not yield immediate profits, but in the long run it can prove beneficial for investors. If the company’s business does well in future, then the increased number of shares can give higher returns to investors. This is the reason why long term investors consider bonus shares as a positive sign. It is not right to get excited just after seeing the bonus share. Before investing, it is important to understand the company’s financial position, profits, future plans and business model. Bonus can be a good sign, but investment decisions should not be taken on this basis alone.
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