Introduction
What is a Bonus Issue of Shares?
A bonus issue of shares is a method used by companies to reward their existing shareholders. Instead of paying dividends in cash, the company issues additional shares to its shareholders free of charge. These additional shares are given to the shareholders in proportion to their existing shareholdings.
How Does a Bonus Issue Work?
Why Do Companies Issue Bonus Shares?
Companies issue bonus shares for various reasons. One common reason is to improve liquidity in the stock. By increasing the number of shares in circulation, the company can make its stock more attractive to investors and increase trading activity.
Another reason is to reward existing shareholders. By issuing bonus shares, companies can show their appreciation to shareholders and increase shareholder loyalty. Additionally, bonus shares can be seen as a way for companies to conserve cash. Instead of paying dividends in cash, the company can use its cash reserves for other purposes, such as expansion or debt repayment.
Conclusion
When a company decides to issue bonus shares, it typically does so by capitalizing its reserves or accumulated profits. This means that the company converts a portion of its retained earnings into share capital, which is then distributed to shareholders as bonus shares.
The main purpose of a bonus issue is to increase the liquidity of the company’s shares and make them more attractive to investors. By increasing the number of shares in circulation, the company can potentially increase trading activity and improve the marketability of its stock.
One of the key benefits of bonus issues is that they provide shareholders with an opportunity to increase their stake in the company without having to invest additional capital. This can be particularly beneficial for long-term shareholders who believe in the company’s growth prospects and want to increase their ownership.
From a shareholder’s perspective, bonus issues can have both advantages and disadvantages. On the positive side, bonus shares can increase the overall value of a shareholder’s investment and provide a higher dividend yield. On the negative side, the increased number of shares can dilute the ownership stake of existing shareholders.
Emily Bibb simplifies finance through bestselling books and articles, bridging complex concepts for everyday understanding. Engaging audiences via social media, she shares insights for financial success. Active in seminars and philanthropy, Bibb aims to create a more financially informed society, driven by her passion for empowering others.