Skip to main content

What are bonus shares , its advantages & disadvantages ?

By
Bonus shares are among popular corporate actions along with dividends. Companies which can not pay a dividend in the form of cash because of liquid funds crisis in spite of earning a good profit as they want to retain some good amount of profit in their reserves issues additional shares to its existing shareholders which are known as bonus shares. Characteristics of these shares are similar to those which shareholders already own with one difference, earlier shares were issued against the receipt of consideration in cash and bonus shares are issued for free of cost. Because of this reason, it is termed as a bonus. Once they are issued by the company like other shares they are successfully reflected in Demat account of investors.
Following are some of the advantages of bonus shares:
From company's point of view
  • Issue of bonus shares facilitates a company to conserve cash which can be further reinvested for carrying out different operational and functional activities.
  • At times when a company is not in a position to pay dividends in the form of cash then the only means to satisfy shareholder's desire for dividend is giving them some extra shares in the form of a bonus.
  • Helps in building a better market image and attract more number of small investors.
From investors point of view
  • Investors get tax benefits as no tax is levied on additional bonus shares issued to them.
  • Long term investors are benefited to large extent with these shares as they are willing to expand their investment in that company and believe in long term story of the company.
  • In future when the company will pay a dividend in the form of cash, investors will receive more as they will be holding more number of shares.
Disadvantages of bonus shares
From company's point of view
  • With this additional issue of shares, the company does not receive any cash which reduces the company's ability to raise its capital.
  • Issue of bonus increases the number of outstanding shares which will decrease future EPS (Earning Per Share).
From investors point of view
  • Not all investors are happy with the bonus shares. As they may be interested in cash to fulfill their other objectives for which they have made this investment.
  • It does not give any extra wealth to shareholders as share price drops to some proportionate amount to maintain the market capital of the company same as before.
These are some of the advantages and disadvantages of bonus shares. They can be issued after twelve months from the issue of shares for consideration and only out of reserves which are created from profit realized in cash that is a company must have a significant amount of undistributed profit. Also this proposal made by the board of directors is first approved by existing shareholders in a general meeting.
Labels:

Comments

Post a Comment

Popular posts from this blog

What is MIS, NRML and CNC order types in stock market ?

By
MIS (Margin Intraday Square Off) MIS order types are for intraday traders and need to squared off during the same trading day. It will be activated till that particular trading day only.The biggest advantage of this order type is that while buying shares using it traders need not to pay the entire amount only a margin amount is required to be paid.Because of this feature traders can buy more number of shares with less capital. If in case position is not squared off or converted into other order types by the traders end then it will be automatically squared off by RMS few minutes before the market closes. If you want to strictly trade on intraday basis then you can rely on usage of such order type. As here you need to worry about squaring off your position, it will automatically get squared off before market closes. NRML (Normal Order) NRML order type is used while trading in future market. It is used to carry forward trade orders in derivatives segment. This order type w...
Post a Comment
Read more

Buy back stocks: Meaning, advantages & disadvantages.

By
Meaning of buy back stocks Buyback stocks is a process where companies repurchase its stocks from stockholders or open market. This is generally considered to be a good sign as it is one indirect way for companies with surplus cash to maximize the wealth of its stockholders.A company with surplus cash prefer to buy its stocks when current market price of stocks is less than book value or what they expects it to be. Companies buy their stocks at a premium price and this leads to increase in stock price. Possible reasons for buyback are discussed below: 1) To increase stockholders value as company uses its surplus funds which is not suitable for any investment options it results in higher earning per share. 2)For protection against corporate takeovers. Buyback helps in increasing the promoters holding thereby reducing the chances of takeover. 3)To improve financial ratios as buyback reduces the cash component on companies balance sheet. Advantages of buyback : 1)Com...
Post a Comment
Read more

How to open a Demat account and what benefits are offered by dematerialization?

By
With the introduction of new technologies trading in the stock market has changed a lot. Earlier when BSE was formed in 1875 at that time traders and investors used to stand on floor and shout prices of stocks for buying and selling. The money was exchanged between buyer and seller and a physical copy in the form of certificate was issued to the buyer.The entire process was very time-consuming. In 1996 concept of dematerialization was introduced in share market. Physical copies of shares were replaced by electronic form and were credited and debited from the Demat account of a trader. Following are the benefits offered by dematerialization : 1)Common bank In Demat account along with shares, other financial instruments like bonds can be stored as well. Traders can use the same account to trade in stocks and bonds both. 2)Time and cost To deliver a physical copy of shares cost is involved and also it takes the time to do so. With dematerialization, this cost and time c...
Post a Comment
Read more