What is a Bonus Issue and Why Do Companies Issue Them?
A bonus issue is a way for a company to reward its shareholders by issuing them additional shares without increasing the market value of the company. This means that if you own 100 shares of a company that declares a 2-for-1 bonus issue, you will now own 200 shares, but the total value of your investment will remain the same.
There are a few reasons why companies might issue bonus shares. One reason is to attract more retail investors to their stock. By making their stock more affordable, companies can make it more accessible to a wider range of investors. Another reason is to conserve cash. If a company doesn't have enough cash to pay dividends, it can issue bonus shares instead. This can help the company save money in the short term, while still rewarding shareholders. Finally, some companies issue bonus shares to make their stock look more attractive to potential investors. By increasing the number of shares outstanding, companies can make their stock appear more liquid and easier to trade.
How Do Bonus Issues Work?
Bonus issues are usually issued in proportion to the number of shares that each shareholder already owns. So, if you own 100 shares of a company that declares a 2-for-1 bonus issue, you will receive 100 additional shares. These new shares will be issued at no cost to you, and they will have the same value as the shares that you already own.
Bonus issues do not affect the total value of your investment. However, they can dilute the value of your existing shares. This is because the number of shares outstanding will increase, but the total value of the company will remain the same.
Bonus issues can be a way for companies to reward their shareholders and attract new investors. However, it's important to understand how bonus issues work before you decide whether or not to participate.