{"id":369,"date":"2020-04-09T07:31:31","date_gmt":"2020-04-09T07:31:31","guid":{"rendered":"https:\/\/www.invest19.com\/blog\/?p=369"},"modified":"2020-04-09T07:35:04","modified_gmt":"2020-04-09T07:35:04","slug":"bonus-shares-definition-reason-advantages-disadvantages","status":"publish","type":"post","link":"https:\/\/www.invest19.com\/blog\/bonus-shares-definition-reason-advantages-disadvantages\/","title":{"rendered":"Bonus Shares \u2013 Definition, Reason, Advantages &#038; Disadvantages"},"content":{"rendered":"<div style=\"margin-top: 0px; margin-bottom: 0px;\" class=\"sharethis-inline-share-buttons\" ><\/div>\n<p>When a company start making consistent profits or generating enough cash, it usually shares its profits with shareholders as a reward for providing it with the capital to run the business. In doing so, the company start paying dividends to shareholders. However, it is up to the board of directors whether to pay dividends or not. It is the board of directors that appointed by the shareholders to decide what percentage of earnings should company pay in dividend or use for other opportunities like investing in business growth, paying-off debt, buying back own shares, making acquisitions etc. But, sometimes companies decide to reward the shareholders with additional shares <em>aka<\/em> bonus shares. <\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"counter-hierarchy counter-decimal ez-toc-grey\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\"><i class=\"ez-toc-glyphicon ez-toc-icon-toggle\"><\/i><\/a><\/span><\/div>\n<nav><ul class=\"ez-toc-list\"><li><a href=\"#What_are_Bonus_Shares\" title=\"What are Bonus Shares?\">What are Bonus Shares?<\/a><\/li><li><a href=\"#Why_Companies_Issue_Bonus_Shares\" title=\"Why Companies Issue Bonus Shares?\">Why Companies Issue Bonus Shares?<\/a><\/li><li><a href=\"#Bonus_Shares_Advantages_Disadvantages\" title=\"Bonus Shares \u2013 Advantages &amp; Disadvantages\">Bonus Shares \u2013 Advantages &amp; Disadvantages<\/a><ul><li><a href=\"#Advantages_From_the_Investors_Point_of_View\" title=\"Advantages: From the Investor\u2019s Point of View\">Advantages: From the Investor\u2019s Point of View<\/a><\/li><li><a href=\"#Advantages_From_the_Companys_Point_of_View\" title=\"Advantages: From the Company\u2019s Point of View\">Advantages: From the Company\u2019s Point of View<\/a><\/li><li><a href=\"#Disadvantages_From_Investors_Point_of_View\" title=\"Disadvantages: From Investor\u2019s Point of\nView&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; \">Disadvantages: From Investor\u2019s Point of\nView&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <\/a><\/li><li><a href=\"#Disadvantages_From_Companys_Point_of_View\" title=\"Disadvantages: From Company\u2019s Point of View\">Disadvantages: From Company\u2019s Point of View<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\">What are Bonus Shares?<\/h2>\n\n\n\n<p><strong>Definition \u2013 <em>\u201cBonus shares are\nadditional shares issued by a company to its existing shareholders with no additional\ncost, based on the number of shares that the shareholder already owns.\u201d<\/em><\/strong><\/p>\n\n\n\n<p>The interesting thing about the issuance\nof bonus shares is that when a company decides to issue bonus shares, the value\nof company remained constant meanwhile the issue of bonus shares increased the\ntotal number of shares issued. <\/p>\n\n\n\n<p>It usually happens, when a\ncompany made profits, thus increase in employed capital. Technically, the issue\nof bonus shares is the alternative of dividends. But, due to a shortage of\nliquid funds or government restrictions on dividends payouts, the company\ndecides to go with the option of bonus shares. Unlike the rights issue where\nthere is a risk of dilution of investment, the bonus issue does not risk\ndiluting your equity investment. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Why Companies Issue Bonus Shares?<\/h2>\n\n\n\n<p>Generally, a company tends to\nreward their shareholders in form of dividends but when the company decides to\navoid showing the distributable income on the balance sheet, ploughing back its\nprofits into the capital which it has to distribute otherwise, it issue bonus\nshares. It benefits a company to avoid the investors demand dividends. When a\ncompany is making consistent profits and accumulating huge profits, it\u2019s\nobvious for a company to increase dividend payments, investors entitled to. <\/p>\n\n\n\n<p>Hence, to avoid converting its accumulated profits into heavy dividend payments, the company issue bonus shares instead.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Bonus Shares \u2013 Advantages &amp; Disadvantages<\/h2>\n\n\n\n<h3 class=\"wp-block-heading\">Advantages: From the Investor\u2019s Point of View<\/h3>\n\n\n\n<ul class=\"wp-block-list\"><li>There are no tax implications of receiving bonus\nshares for investors however when they are sold, they may be taxable \u2013 LTCG or\nSCTG tax, depending upon the holding period. <\/li><li>Bonus Shares are free of cost to shareholders as\nthey are issued by the company, which in turn increase the overall outstanding\nshares of an investor in the company, ultimately, enhances the liquidity of the\nstock. <\/li><li>Bonus shares are advantageous for investors who\nare looking to make investments over the long-term to build a corpus for\nretirement saving plan or to achieve other long-term financial goals. <\/li><li>Bonus shares help in building the trust of an investor\nin company\u2019s business &amp; operations as the faith under which investor invested\nin the company is intact and the company is putting that capital in good use and\nrewarding investor for it. &nbsp;<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Advantages: From the Company\u2019s Point of View<\/h3>\n\n\n\n<ul class=\"wp-block-list\"><li>Issue of Bonus shares benefits companies to get\nthemselves out of the situation where they are not able to or simply not prefer\nto pay cash dividends to its shareholders. In such circumstances, the companies\ndecide to pay extra shares to oblige their shareholders in place of dividend\npayouts. <\/li><li>Issue of bonus shares may not increase the value\nof the company but it sure enhances its position and image in the market, gaining\nthe trust of existing shareholders and attracting many small-investors to\nparticipate in the stock market and invest in the growth of those companies. <\/li><li>With the issue of bonus shares, the companies\nhave more free-floating shares in the market. <\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Disadvantages: From Investor\u2019s Point of\nView&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <\/h3>\n\n\n\n<ul class=\"wp-block-list\"><li>There is not much of a disadvantage of owning\nthe bonus share otherwise, it won\u2019t be called by bonus share. However, one\nthing investors should know that the on receiving bonus shares, the profits\nwill remain the same but as the number of shares increased, the Earning per\nShare (EPS) will decline. <\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Disadvantages: From Company\u2019s Point of View<\/h3>\n\n\n\n<ul class=\"wp-block-list\"><li>In issuing bonus shares, the companies do not\nreceive any cash. As a result, the ability to raise money by follow-on offerings\nis reduced. <\/li><li>When a company keep issuing bonus shares instead\nof paying cash dividends, the cost of the bonus issue keeps adding up over the\nyears. <\/li><\/ul>\n<div class='epvc-post-count'><span class='epvc-eye'><\/span>  <span class=\"epvc-count\"> 13,594<\/span><\/div><div class=\"pld-like-dislike-wrap pld-template-1\">\n    <div class=\"pld-like-wrap  pld-common-wrap\">\n    <a href=\"javascript:void(0);\" class=\"pld-like-trigger pld-like-dislike-trigger \" title=\"\" data-post-id=\"369\" data-trigger-type=\"like\" data-restriction=\"ip\" data-ip-check=\"0\" data-user-check=\"1\">\n                        <i class=\"fas fa-thumbs-up\"><\/i>\n                    <\/a>\n    <span class=\"pld-like-count-wrap pld-count-wrap\">10    <\/span>\n<\/div><\/div>\n\n","protected":false},"excerpt":{"rendered":"<p>When a company start making consistent profits or generating enough cash, it usually shares its profits with shareholders as a reward for providing it with [&hellip;] <span class=\"read-more-link\"><a class=\"read-more\" href=\"https:\/\/www.invest19.com\/blog\/bonus-shares-definition-reason-advantages-disadvantages\/\">Read More<\/a><\/span><\/p>\n","protected":false},"author":1,"featured_media":373,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[88,89,90],"class_list":["post-369","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investment","tag-bonus-shares","tag-bonus-shares-advantages","tag-bonus-shares-disadvantages"],"_links":{"self":[{"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/posts\/369","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/comments?post=369"}],"version-history":[{"count":2,"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/posts\/369\/revisions"}],"predecessor-version":[{"id":374,"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/posts\/369\/revisions\/374"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/media\/373"}],"wp:attachment":[{"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/media?parent=369"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/categories?post=369"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/tags?post=369"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}