Advantages of bonus share: One of the most gratifying experiences in life is receiving rewards and free gifts, especially when it’s completely unexpected. It could be a free gift with your credit card shopping, a freebie when you buy a new smartphone, or even an extra muffin with your birthday cake.
All of them have one underlying cause for causing joy – receiving something for free without having to incur any extra costs. This blog will cover one such free gift, in terms of investors and the stock market – Bonus shares. Here we’ll discuss what are bonus shares, why they are issued, and the advantages of bonus share.
What Is Bonus Share?
By definition, bonus shares are the extra shares given by listed companies to their existing shareholders as a reward or compensation. These shares are issued to shareholders without them having to pay extra for the shares.
Why Are Bonus Shares Issued By Companies?
The board of directors of listed companies sometimes compensates shareholders for investing and holding shares of the company. They do this by issuing dividends on a timely basis. But when the company doesn’t have the cash to pay dividends, they offer shareholders bonus shares. The shares are given based on the existing holding of the shareholders. It is also known as the capitalization of profits.
Types Of Bonus Shares
Continue reading to discover more about the various kinds of bonus shares available.
1. Fully Paid Bonus Shares
Above, we mentioned how bonus shares are issued when a company is short on funds to issue dividends. Instead, they issue bonus shares. Fully paid bonus shares are those shares that are given to investors based on their holdings in the company. But if the company lacks funds, to begin with, where are the funds to issue bonus shares? It can come from one of three sources :
- Profit & Loss Account
- Capital Reserves and
- Security Premium Account
2. Partly-Paid Up Bonus Shares
A partly paid-up share is when a share in a company is only partially paid when compared to its full issue price. Investors can buy such shares without having to pay the full price for them. In case you’re wondering about the unpaid part of the shares, investors do have to pay the company when they make calls to do so.
Bonus in case of partly paid-up shares converts them into fully paid shares. When this happens, without the company making calls for the unpaid amount, it is called partly paid-up bonus shares. The main difference here is that the company will not issue bonus shares using the company’s capital redemption reserve account/security account.
Advantages Of Bonus Share
Here are some of the important perks and advantages of bonus shares:
- The bonus shares that investors receive from companies are exempt from taxes.
- Bonus shares increase the number of outstanding shares of a company, thereby improving its liquidity as well.
- From the company’s point of view, it allows them to save cash from issuing dividends. That cash can otherwise be used for capital expenditure, business expansion, or a new business division altogether.
- Investor relations with the company improve over time and the investors assume that the company has great expectations for the future.
Bonus issue of shares is an exciting practice in the investing community. Here both parties (investors and companies) benefit from the bonus issue, and the act is seen as a show of faith and confidence in the company’s future performance. That’s all for this article on “Advantages of bonus share”. If you want to learn more about such investing concepts, sign up for free on Fingrad today! Happy Investing!
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