What Are Bonus Shares: Benefits And Drawbacks?

When a company has earned sufficient profits for the quarter but is unable to distribute a dividend to its shareholders, it may instead issue a bonus share allocation to its current owners as a “BONUS.” Following is more information on what is bonus share.

For example

One for two bonus shares means that for every share a shareholder already has, they will get two more shares in the corporation.

Let’s pretend one of your company’s shareholders has 2,000 shares. He will earn 1,000 bonus shares (2000 * 1/2 = 1,000) if and when the corporation releases bonus shares in 1:2 ratio.

The terms “record date” and “ex-date” are often used in conjunction with the issuance of bonus shares to shareholders by a firm. The definitions of “record date” and “ex-date” are provided below.

How do you determine the Record Date?

The record date is the date the corporation establishes as the cut-off for receiving bonus stock. All stockholders with stocks in their Demat accounts will get bonus shares as of the record date from the company.

What is the meaning of Ex-Date?

One day before the record date is the ex-date. A buyer must purchase shares at least one day before the ex-date to qualify for the bonus shares.

Who can receive bonus stock?

When a corporation announces a bonus stock distribution, those who already possess shares of the firm’s stock as of the ex-date and record date are eligible to receive the bonus.

Delivery of shares is arranged using a T+1 rolling system in India, where the record date follows the ex-date by one business day.

If shareholders buy shares on the ex-date, the firm will not transfer legal ownership of the shares to the shareholders until after the ex-date, making them ineligible to obtain bonus shares.

When the bonus stock has been assigned an ISIN (International Securities Identification Number). Within 15 days, the shareholder’s account will be credited with the bonus shares

Benefits of Bonus Shares

1. The company’s bonus stock does not subject the investor to any tax liability.

2. Shareholders who have been invested in the firm for a long time and are trying to increase their financial return on investment may benefit from receiving bonus shares.

3. The issuance of bonus shares by the corporation at no extra cost to the shareholder raises the total number of outstanding shares held by the owner and makes the stock more liquid.

4. Investors’ faith in a company’s ability to generate profits is bolstered when they get bonus stock in exchange for their initial capital investment.

Disadvantages

From the Perspective of an Investor

Holding the bonus shares has little to no downside. Nonetheless, they should be aware of the possibility of acquiring bonus shares since the company’s overall profit will stay the same even if the number of shares is raised and the earnings per share decreases.

From the Perspective of the Business

1) When a corporation issues bonus stock, it does not get any cash. Following an offering reduces the possibility of raising capital.

2) The cost of the bonus granted continues rising up over time when a corporation keeps issuing bonus shares rather than paying dividends.

Conclusion

Now you know about bonus shares, in sum, bonus shares enhance a company’s image in the market, gaining shareholders trust and confidence. But you can buy or sell or receive bonus shares if you have a demat account. So, open demat account and start your journey of stock investment.