When a company issues some additional shares and decides to offer them to its current shareholders based on number of shares possessed by them. The key feature of bonus share is that the company issues these shares to shareholders without any extra cost.
Reasons for issuing bonus shares
Bonus shares are issued under the circumstance when a company fails to pay a dividend to its existing shareholders as a result of lack of funds despite earning decent profits for a particular quarter. In such a situation, the company seeks to issue bonus shares to the current shareholders instead of making the dividend payment. Bonus shares are unusually offered to the shareholders after determining their current holding in the company. The process of issuing bonus shares to the shareholders is also known as capitalization of profits as it is issued out of profits or company's reserves.
How calculation of bonus share is done?
Shareholders receive bonus shares as per their current stake in the company. It can be cited like when a company announces 1for 2 bonus shares it will imply that a current shareholder will be eligible to receive one bonus share of a company for every two shares possessed. If a shareholder retains 2000 shares of a company and the company issues additional bonus shares, the shareholder will get 1000 bonus shares. It is worth noting that when a bonus share is issued, the company will use "record date" along with it. Record date is the cut off date that the company decides. If you possess share of the company for this specific cut-off date, you will receive the bonus shares. Setting the record date allows the company to search the entitled shareholders and offer these shares to them.
Benefits of bonus shares
1. When an existing shareholder received bonus shares from the company, it will significantly boost his investments in the company and consequently raises the liquidity of stock. The long-term shareholders of a company who are keen to enhance their investment, can benefit a lot from bonus shares.
2. Bonus shares give a strong boost to the confidence of the investors in the company's operations as company utilizes the cash for the growth of business.
3. The investors are saved from paying any taxes on receiving bonus shares.
4. Whenever the company announces dividend in future, the existing shareholder is set to obtain more dividend as he possesses more shares in the company as a result of bonus shares.
5. Bonus shares send out positive message to the market as it reflects that the company is determined towards its long-term growth.
6. With bonus shares, the outstanding shares are also raised which consequently enhances liquidity of stock.