"Bonus Shares: A Boost to Your Investment Portfolio"

Bonus Share is a term that frequently appears in the world of investing, yet it often raises questions among investors. In this comprehensive guide, we will explore what a Bonus Share is, how it works, and the benefits it offers to shareholders. By the end of this article, you will have a clear understanding of Bonus Shares and their role in investment portfolios.

A Bonus Share is a free additional share given to existing shareholders of a company. These shares are distributed in proportion to the number of shares already owned by a shareholder. For example, if a company announces a 1:1 Bonus Share issue, shareholders will receive one additional share for every share they currently hold. The primary purpose of issuing Bonus Shares is to reward shareholders and increase the liquidity of the shares in the market.

How Do Bonus Shares Work?

When a company decides to issue Bonus Shares, it typically does so by capitalizing a part of its reserves. This means that the company transfers a portion of its retained earnings or free reserves to its share capital account, thereby increasing the total number of shares. However, it’s important to note that while the number of shares increases, the overall market value of the company remains the same. This is because the value of each individual share is diluted proportionately.

For example, if a company has 1 million shares trading at $100 each and decides to issue a 1:1 Bonus Share, the number of shares will double to 2 million. However, the share price will adjust to $50, maintaining the company’s market capitalization at $100 million.

Why Do Companies Issue Bonus Shares?

There are several reasons why a company might choose to issue Bonus Shares:

Rewarding Shareholders: Issuing Bonus Shares is a way for companies to reward their loyal shareholders. By providing additional shares, companies can increase shareholder wealth without impacting the company’s cash reserves.
Increasing Liquidity: Bonus Shares can help increase the liquidity of a company’s stock. By increasing the number of shares available in the market, Bonus Shares can make it easier for investors to buy and sell the stock.
Positive Signal: The issuance of Bonus Shares can be seen as a positive signal by the market. It indicates that the company has strong financial reserves and is confident in its future growth prospects.
Adjusting Share Price: In some cases, a company’s share price may become too high, making it less accessible to small investors. By issuing Bonus Shares, the company can lower the share price, making it more affordable for a broader range of investors.

Benefits of Bonus Shares

Bonus Shares offer several benefits to shareholders:

Increased Holdings: One of the most direct benefits of Bonus Shares is the increase in the number of shares a shareholder owns. This can lead to higher potential returns if the company’s stock price appreciates in the future.
Tax Efficiency: In many jurisdictions, Bonus Shares are not subject to immediate taxation, as they are not considered income. Instead, they may be subject to capital gains tax when sold, often at a lower rate.
Long-Term Investment: Bonus Shares can encourage shareholders to hold onto their investments for a longer period. As they receive additional shares, they may be more inclined to remain invested in the company.
Cost Averaging: By receiving Bonus Shares, shareholders effectively reduce the average cost per share of their holdings. This can be beneficial if the company’s stock price increases over time.

Considerations and Drawbacks

While Bonus Shares offer several advantages, there are also some considerations and potential drawbacks to keep in mind:

Dilution of Share Price: As mentioned earlier, the issuance of Bonus Shares leads to a dilution of the share price. While the total market value remains the same, the value of each individual share decreases, which may not be favorable for all investors.
No Immediate Cash Benefit: Unlike dividends, Bonus Shares do not provide an immediate cash benefit. Shareholders receive additional shares, but they may need to sell these shares to realize any cash gains.
Market Perception: The market may perceive the issuance of Bonus Shares differently. While some investors view it as a positive signal, others may see it as a sign that the company lacks better uses for its reserves.
Adjustment Period: Following the issuance of Bonus Shares, there may be a period of adjustment as the market recalibrates the stock’s value. This can lead to temporary volatility in the share price.

How to Invest in Bonus Shares: A Brief Guide

Investing in Bonus Shares involves a few key steps, but it’s essential to understand that you cannot directly buy Bonus Shares; they are issued to existing shareholders by the company. Here’s a brief guide on how to invest in companies that offer Bonus Shares:

Research Companies: Start by researching companies that have a history of issuing Bonus Shares. These are often companies with strong financials and consistent growth. Look for announcements in company reports, financial news, or stock exchange notifications.
Buy Shares Before the Record Date: To receive Bonus Shares, you must own the company’s shares before the record date. The record date is the cut-off date set by the company to determine which shareholders are eligible for the Bonus Share issue. If you purchase shares after this date, you will not be eligible to receive the Bonus Shares.
Hold the Shares: Once you’ve purchased the shares, you need to hold them until the Bonus Shares are credited to your account. The company will announce the date on which the Bonus Shares will be distributed, known as the issue date.
Check for Crediting of Bonus Shares: After the issue date, check your Demat account or consult with your brokerage to ensure that the Bonus Shares have been credited. The additional shares will appear in your account based on the ratio announced by the company (e.g., 1:1, 1:2).
Monitor Your Investment: After receiving the Bonus Shares, monitor your investment. While the share price may initially drop due to the dilution effect, the increased number of shares can lead to higher returns over time if the company’s value grows.
Consider the Tax Implications: Be aware of the tax implications of receiving Bonus Shares. In many cases, they are not immediately taxable, but capital gains tax may apply when you sell them.