- This article presents eight advantages of bonus shares issuance to an investor, and shows why this is a benefit for long-term investment.
Bonus shares are extra shares that are handed to a company’s existing shareholders at no cost as part of a dividend reward system. Dividends usually come in two forms: cash or scrip. The scrip dividends format are the bonus shares.
Typically, companies that are listed on exchanges have a pool of unallocated, outstanding shares. A company can decide to reward its shareholders by giving out these outstanding shares as bonus shares, usually in a set ratio. The value of these bonus shares does not increase instantly, as the share price of the stock is usually marked down using a calculation that ensures the total market cap of the stock is unaltered by the bonus share allocation. Rather, the value lies more in the long-term benefits of the holdings, as share appreciation over time turns the bonus allocations into more valuable holdings.
Top 8 Advantages of Bonus Share Holdings
So here are the top 8 advantages that investors will get from bonus share allocations.
1. Cost-free increase in shareholding
Bonus shares are to every extent, FREE allocations. Ever made use of the regular shop coupons that advertise in the line of: “buy two and get one for free?” This is basically what bonus shares are all about. The investor is essentially receiving additional shares at no cost. Some shareholders simply buy shares for this purpose, especially if these shares are to be considered as a form of inheritance that can be passed down, or are purchased for long-term cash dividend benefits. This way, an investor can increase their stake in the ownership of the firm without having to put down any additional capital.
2. Long-Term Wealth Creation Prospects
Bonus shares are a vehicle that can lead to long-term wealth creation benefits. There are many examples of companies that have rewarded their long-term shareholders in this manner. Not only can these investors benefit from enhanced future capital appreciation from shares they got for free, but these can continue to compound themselves if the company gives additional shares and cash dividends in future. Also, some companies only give rights offers for existing shareholders, and these are usually given as a ratio of new shares for a certain number of existing shares held. The cumulative impact of all these can be substantial.
3. Improved Liquidity and Volumes
A bonus issue raises the number of circulating shares of a company. This will lead to enhanced liquidity and trading volumes. It becomes much easier to buy and sell the stock without a significant impact on the share price of the asset.
4. Greater Accessibility
Similar to what happens during a stock split, share prices are marked down proportionately when a company issues bonus shares. If the investor is looking for an opportunity to increase shareholding by putting in additional investment, taking advantage of marked-down prices is a vehicle for doing so. The lower share price makes the stock more accessible to a broader spectrum of investors. Increased market participation can boost share price appreciation through demand.
5. Positive Signal About Company Confidence
News of bonus share awards increases a company’s market standing among its peers. When companies are confident about their future prospects, the issuance of bonus shares is a way that company gives out vibes about its growth potential and financial reserves.
6. Futuristic Higher Dividend Potential
Bonus dividends give investors greater shareholding. If the company grows and increases its market cap and valuation, the potential for higher cash dividend payouts increases. For those now holding more shares than they originally put money down for, the potential to earn higher dividends in the future from an expanded shareholding base is a very attractive prospect.
7. Tax Efficiency
In many jurisdictions, bonus shares issuance is not taxed. The tax only comes in when these shares are monetized in future through sales in the secondary market. This is also an added incentive for an investor to continue owning these shares, which gives a greater potential for future benefits from capital appreciation and dividend payments.
8. Boosts Investor Sentiment
Market sentiment around a company is an integral part of that company’s share price performance. Even if a company reports sound earnings and a boost in profits and revenue, negative sentiment can still hit the stock price. There are several examples that have occurred recently. We saw shares of some AI stocks plummet despite an earnings’ beat. The reason? It was all about perception, with doubts about the ability to sustain these performances well into the future. That shows the importance of sentiment.
Issuance of bonus issues is capable of generating positive sentiment in a stock. Bonus shares issuance is viewed as a shareholder-friendly action and the improved sentiment can actually lead to greater demand for the stock.
Final Thoughts
Bonus shares should not be viewed immediately as free money. Once issued, the stock’s price is marked down, which leaves the company’s overall market capitalization unchanged. The real value of bonus shares comes when they are held for the long-term on the back of improving company fundamentals and boost in share price.
