Guide to Bonus Share 2024: What Investors Need to Know

June 20, 2024
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Introduction:
Bonus shares, also known as scrip dividends or capitalization issues, are additional shares given to existing investors by a company free of charge. This is a way for companies to reward shareholders without distributing cash dividends. In this guide to Bonus Share 2024, we will explore everything investors need to know about this form of corporate action.

What are Bonus Shares?
Bonus shares are issued to existing shareholders in proportion to their current holdings. For example, if a company declares a 1-for-1 bonus issue, shareholders will receive one additional share for each share they already own. The total value of the investment remains the same, but the number of shares increases.

Why do Companies Issue Bonus Shares?
Companies issue bonus shares for various reasons, such as:

  1. Conservation of Cash: By issuing bonus shares instead of cash dividends, companies can conserve their cash for other strategic purposes.

  2. Rewarding Shareholders: Bonus shares reward existing shareholders by increasing their holdings in the company without any additional cost.

  3. Increasing Liquidity: Bonus shares increase the number of outstanding shares, which can enhance the liquidity of the stock in the market.

Impact of Bonus Shares on Investors:

  1. Dilution: While bonus shares do not dilute the value of the investment, they dilute the earnings per share (EPS) and the return on equity (ROE) metrics.

  2. Market Reaction: The announcement of bonus shares can lead to a positive market reaction as it is seen as a sign of confidence by the company in its future performance.

  3. Tax Implications: In most countries, bonus shares are tax-free for shareholders at the time of issuance. However, when the bonus shares are eventually sold, capital gains tax may apply.

How to Evaluate Bonus Share Issues:

  1. Company Performance: Evaluate the company’s financial performance and future prospects before considering the impact of bonus shares.

  2. Share Price Movement: Monitor the share price movement after the announcement of bonus shares to gauge market sentiment.

  3. Impact on Ratios: Consider the impact of bonus shares on key financial ratios such as EPS, price-to-earnings ratio, and ROE.

FAQs (Frequently Asked Questions):

  1. Are bonus shares the same as stock splits?
  2. No, bonus shares are free additional shares given to existing shareholders, while stock splits involve dividing existing shares into multiple shares.

  3. Can bonus shares be sold immediately after receiving them?

  4. Yes, bonus shares can be sold immediately after receiving them, subject to market conditions and trading regulations.

  5. Do bonus shares affect dividend payments?

  6. Bonus shares do not affect dividend payments as they are issued free of charge and do not impact the company’s cash reserves.

  7. How are bonus shares different from rights issues?

  8. Bonus shares are issued free of charge to existing shareholders, while rights issues require shareholders to purchase additional shares at a discounted price.

  9. Can bonus shares improve shareholder value?

  10. Bonus shares can improve shareholder value by increasing the number of shares held, potentially leading to capital gains in the long term.

In conclusion, bonus shares can be an attractive way for companies to reward their shareholders and boost investor confidence. By understanding the implications of bonus shares and how to evaluate them, investors can make informed decisions regarding their investment portfolios.

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His love for reading is one of the many things that make him such a well-rounded individual. He's worked as both an freelancer and with Business Today before joining our team, but his addiction to self help books isn't something you can put into words - it just shows how much time he spends thinking about what kindles your soul!

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