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Bonus shares are a topic often surrounded by misconceptions and confusion. When we define a bonus share we mean the additional shares issued to existing shareholders by a company can significantly impact their investment portfolio, but many myths persist about their nature and benefits. In this blog, we will debunk seven common myths about bonus shares, clarifying what they are, how they work, and what investors should know.
Table of Contents
1. Myth: Bonus Shares Are Free Money
It is often believed that one of the benefits of bonus shares is that they are free money. This is a misconception. This belief stems from the fact that these shares are issued without any additional cost to existing shareholders. However, the reality is that bonus shares are distributed based on existing holdings and do not add any new value to the company or the shareholder’s overall investment. Instead, they are a way for companies to issue additional shares without requiring shareholders to pay extra.
Bonus shares are issued in proportion to existing holdings, so while they increase the number of shares a shareholder owns, they do not change the total value of the investment. On the Share India platform, which aims to provide an automated trading platform to every Indian household, investors can track these changes in their portfolios effectively.
2. Myth: Bonus Shares Dilute the Value of Existing Shares
When it comes to knowing what is bonus shares, another prevalent myth is that these shares dilute the value of existing shares. While it’s true that issuing bonus shares increases the total number of shares outstanding, it does not directly dilute the value per share. Instead, the market price of the shares usually adjusts to reflect the increased number of shares. Thus, the overall value of the investment remains the same.
For example, if a company issues a 1:1 bonus share, shareholders receive one additional share for each share they own. Although the number of shares doubles, the market price adjusts accordingly. On the Share India platform, which offers automated tools for tracking such adjustments, investors can easily monitor how bonus shares impact their holdings.
3. Myth: Bonus Shares Are a Sign of Company Strength
Many investors believe that issuing bonus shares is an indicator of a company’s financial health or strength. While bonus shares might be a sign of a company’s confidence in its future, they do not necessarily reflect the company’s financial performance. Companies issue bonus shares as a means to reward shareholders, manage their capital structure, or signal optimism about future growth.
Bonus shares do not directly affect the company’s balance sheet or overall financial stability. The issuance is more about capital reorganisation rather than a direct measure of the company’s success or strength.
4. Myth: Bonus Shares Have Tax Implications
When it comes to knowing what is bonus shares, some believe that receiving such shares results in immediate tax liabilities. However, in many jurisdictions, bonus shares do not attract taxes at the time of issuance. Instead, taxes may apply when these shares are eventually sold or disposed of, based on the prevailing tax laws regarding capital gains or other applicable taxes.
5. Myth: Bonus Shares Are the Same as Stock Splits
While both bonus shares and stock splits involve issuing additional shares, they are not the same. A stock split divides existing shares into multiple new shares, adjusting the share price accordingly. In contrast, bonus shares are issued based on the company’s decision to reward shareholders without altering the nominal value of the shares.
The key difference is that a stock split changes the share structure of the company, while bonus shares merely increase the number of shares without changing the company’s overall capital structure.
6. Myth: Bonus Shares Improve Liquidity
It is often believed that one of the benefits of bonus shares is that it improves liquidity in the market. However, while the issuance of bonus shares increases the number of shares available for trading, it does not necessarily enhance liquidity. Liquidity is more about the ease with which shares can be bought or sold without significantly affecting the market price. The impact of bonus shares on liquidity depends on various factors, including market conditions and trading volumes. On the Share India platform, investors can analyse trading volumes and liquidity indicators to better understand how bonus shares affect their investments.
7. Myth: All Companies Issue Bonus Shares
Not all companies issue bonus shares, and it is not a universal practice. The decision to issue bonus shares depends on a company’s specific financial strategy, capital management policies, and overall objectives. Companies with substantial retained earnings or those looking to reward shareholders may consider issuing bonus shares, but it is not a standard practice for all firms. The issuance of bonus shares is typically aligned with a company’s broader strategy and goals, making it a selective process.
In conclusion, understanding bonus shares and the myths surrounding them is crucial for making informed investment decisions. Bonus shares, while often misunderstood, are a mechanism for companies to reward existing shareholders and manage their capital structure. By clarifying these common misconceptions, investors can better navigate the complexities of bonus shares and make more informed choices about their investments.