Definition
Bonus shares are additional shares issued by a company to its current shareholders, without any extra cost, based on the number of shares a shareholder owns. They are essentially a dividend paid in the form of additional shares rather than cash. These shares are issued from the company’s accumulated earnings.
Key Takeaways
- Bonus Shares are the additional shares provided to the shareholders without any extra cost. These are issued by the company from its accumulated earnings.
- Bonus shares do not result in a cash outflow for the company. Instead, they convert the company’s profits or reserves into share capital which increases the total number of shares.
- Issuing bonus shares to existing shareholders shows the company’s confidence in its future earning potential, often leading to increased investor confidence and higher market capitalization.
Importance
Bonus shares are important in the financial world because they’re a way for companies to distribute profits back to shareholders without depleting cash reserves.
This is especially beneficial in times of cash shortages when business entities need to retain the cash for operations or for reinvestment in future projects.
By issuing bonus shares, companies can increase their issued share capital, consequently improving their market standing and attractiveness to investors.
Meanwhile, for shareholders, bonus shares represent a return on investment which can potentially increase in value over time.
Therefore, both from the perspective of companies and shareholders, the concept of bonus shares plays a key role in corporate finance management.
Explanation
Bonus shares, also known as scrip dividends or capitalization issues, serve as a form of additional reward given by corporations to existing shareholders. They are issued by companies to their shareholders free of cost, acting as a more stock-based alternative to issuing dividends.
Its purpose is to capitalize part of the company’s retained earnings or other reserves into share capital. Basically, issuing bonus shares is a company’s way of redistributing its profits back into the venture, rather than doling them out as cash dividends.
Companies often opt for issuing bonus shares in situation where they are short on liquid cash that can be distributed as dividends. Besides, bonus shares also serve as an efficient way to encourage shareholders to put in more capital and retain them for a long-term period.
As bonus shares increase the total number of shares held by the shareholders, they maintain their proportional ownership in the company. This is beneficial for the company as it does not reduce the size of the company’s equity capital, but rather reclassifies it.
Examples of Bonus Shares
Apple Inc Bonus Shares: In 1987, Apple Inc. issued a three-for-one bonus share to their shareholders. Essentially, for every one share someone owned in the company, three additional shares were given. This led to the lowering of the market price per share but increased the number of shares owned by shareholders.
Google Bonus Shares: In 2014, Google issued a two-for-one bonus share to their shareholders. For every share an investor had in the company, they received an additional one. The issuance of these additional shares doubled the number of outstanding shares in the market and it also halved the share price making it more attractive and affordable for new investors to buy the company’s stock.
Bharat Petroleum Bonus Shares: In India, Bharat Petroleum Corporation Limited (BPCL) in 2017 announced the issue of one bonus share for every two existing shares held. As a result, the number of shares held by the shareholders of the company increased without an additional investment. This was done to make the shares more affordable, thus attracting more investors by making the shares more accessible.
Bonus Shares FAQ
What are bonus shares?
Bonus shares are additional shares of a company given to the existing shareholders without any additional cost, based upon the number of shares that a shareholder owns. It is a form of dividend paid by companies in the form of shares rather than cash.
What’s the purpose of issuing bonus shares?
Bonus shares are issued by companies to encourage retail participation and increase their equity base. When the price per share of a company is high, it may discourage small investors from buying shares. By issuing bonus shares, a company inflates the total number of shares, which can potentially enhance liquidity.
How is the value of my shares affected after the issue of bonus shares?
Bonus shares does not impact the overall value of your investment. If a company were to issue 1:1 bonus shares, this would double the number of shares you own, but would also halve the price of each share, keeping the total value of shares the same.
Do bonus shares affect a company’s net worth?
No, issuance of bonus shares does not affect a company’s net worth. Bonus shares are issued to shareholders out of the company’s Free Reserves or Securities Premium. The company basically converts its profits (reserves) into shares.
Related Entrepreneurship Terms
- Stock Splits
- Shareholder Equity
- Capitalization
- Retained Earnings
- Dividend Distribution
