uTrade AlgosWhen companies perform well, they often reward their shareholders by issuing bonus shares. These additional shares are given to existing shareholders without any extra cost, based on the number of shares they already own. While bonus shares are often seen as a windfall, it’s important to understand how they impact investment portfolios in both the short and long term. Here’s a step-by-step guide to understanding the effects of bonus shares on investments.
Table of Contents
Step 1: Understanding Bonus Shares
A company issues bonus shares to its existing shareholders in a predetermined ratio, such as 1:2, 2:3, or 1:1. This means for every two or three shares shareholders hold, they receive one additional share, or for every one share, the shareholder gets another one. These shares are distributed out of the company’s retained earnings, effectively converting the reserves into equity capital.
Step 2: Assessing the Impact on Share Price
When a company issues bonus shares, the total number of shares outstanding increases, which typically leads to a proportional decrease in the share price. For instance, if a company issues bonus shares in a 1:1 ratio, doubling the number of shares in circulation, the share price usually halves. This price adjustment is essential as the company’s overall market capitalisation remains the same.
Example: Suppose Mr X holds 100 shares of a company priced at ₹50 each, with a total value of ₹5,000. After a 1:1 bonus issue, he would hold 200 shares, but the price would adjust to around ₹25 per share, keeping the value at ₹5,000.
On Share India’s automated trading platform, investors can track the impact of bonus shares on their share prices using tracking tools to monitor such adjustments.
Step 3: Evaluating Changes in Equity Ownership
While the share price decreases, the number of shares investors hold increases, which means that their ownership percentage in the company remains unchanged. However, depending on the company’s policies, their increased number of shares could give them more voting power or greater influence in shareholder decisions.
Step 4: Analysing the Impact on Dividends
Dividends, if paid by the company, may be impacted by the issuance of bonus shares. If the company maintains the same per-share dividend rate post-bonus issue, shareholders could receive a higher total dividend due to the increased number of shares they own. However, companies often adjust the per-share dividend rate to reflect the increased number of shares, resulting in the same overall dividend payout as before.
Step 5: Considering the Tax Implications
Bonus shares generally do not have immediate tax implications because they are not considered income at the time of issuance. However, if an individual holds bonus shares as an investment and subsequently sells them, they may be subject to capital gains tax.
Step 6: Evaluating Long-term Portfolio Impact
Over the long term, bonus shares can enhance a portfolio’s value, particularly if the company continues to perform well and its stock price appreciates. If the bonus issue is a sign of the company’s confidence in its future performance, it could signal growth potential, which might benefit long-term investors.
On the Share India trading platform, investors can use advanced tracking and technical analysis tools to monitor their portfolio performance over time.
Step 7: Psychological and Market Perception
Receiving bonus shares can create a positive psychological effect, making shareholders feel rewarded and more confident about their investments. It can also positively influence the market’s perception of the company, as bonus issues often signal the company’s strong financial health. This perception can drive more investor interest and potentially boost the stock price over time.
Conclusion
Bonus shares can be a valuable addition to your investment portfolio, providing investors with potential growth prospects. When companies issue bonus shares, investors have an opportunity to reassess and refine their investment strategy, ensuring that they continue to grow their investment progress. However, it’s essential to understand the mechanics of how bonus shares work, including the impact on share price, dividends, and tax implications. By carefully analysing these factors, investors can make informed decisions that align with their investment goals and maximise the benefits of bonus shares in their portfolios.