Definition
Bonus shares are additional shares given at no cost to existing shareholders of a company, typically derived from a scrip issue. These shares are dispersed proportional to the shareholder’s current holdings. For instance, a 1:4 bonus issue means a shareholder receives one free share for every four that they own. Alternatively, a more generous 2:1 bonus could shower shareholders with two shares for each one they previously held. Ah, the joys of mathematical generosity in the finance world!
How Bonus Shares Work
Bonus shares do not just appear out of thin corporate air. They are typically issued from a company’s retained earnings, transforming profits that were not dished out as dividends into little stock gifts. This strategic move can smoothen the outlandish peaks of market price per share, making the stock accessible to a wider audience of investors, or appeasing investors with a magic trick that turns one share into many.
Why Issue Bonus Shares?
- Rewarding Loyalty: Like a pat on the back, but in stock form.
- Conserving Cash: Companies keep their hard-earned cash by paying you in shares, not dollars.
- Psychological Boost: Funnily enough, owning more shares does wonders for shareholder confidence.
- Increase Marketability: More shares often mean a lower individual share price, potentially making the stock more attractive to small investors.
Scrip Issue Explained
A scrip issue, or a stock dividend, is one method to issue bonus shares. By reallocating reserves to capital, companies act as a sort of financial alchemist, turning the lead of undistributed profits into the gold of new shares. Imagine a company bulking up its share muscles without the financial diet of additional investments!
Related Terms
- Dividend: A portion of earnings distributed to shareholders - Bonus shares are the quiet cousin.
- Stock Split: Like chopping a pie into smaller pieces; more pieces, same pie.
- Retained Earnings: Profits that are reinvested into the company, sometimes ending up as bonus shares.
- Share Capital: The total amount raised by a company through the issue of shares. Bonus shares adjust this figure without new cash input.
Recommended Reading
- “The Intelligent Investor” by Benjamin Graham - A must-read for understanding the underlying principles of investing, including the strategic issuance of shares.
- “Common Stocks and Uncommon Profits” by Philip Fisher - Explore the thinking behind company growth and shareholder rewards, like bonus shares.
Bonus shares hold a special place in the investment landscape. They don’t carry the grandeur of a cash windfall, yet they elegantly offer a subtle nudge in shareholder value—sometimes less is indeed more, financially speaking.
