Because issuing bonus shares increases the issued share capital of the company, the company is perceived as being bigger than it really is, making it more attractive to investors. In addition, increasing the number of outstanding shares decreases the stock price, making the stock more affordable for retail investors.
By issuing bonus shares, the number of outstanding shares increases, but each share’s value reduces, as shown in the example above. The face value remains unchanged.
To calculate the share price after bonus issues, companies must divide the total value of shares of the company before the bonus issue on the number of shares of the company after the bonus issue.
Is bonus issue good or bad?
Bonus issues don’t weaken shareholders’ value, since they are given to existing shareholders in a steady proportion that keeps the overall value of every shareholder equivalent to before the issue. It is helpful for the drawn-out shareholders of the company who need to expand their venture.
Share Dilution
When companies issue additional shares, it increases the number of common stock being traded in the stock market. For existing investors, too many shares being issued can lead to share dilution. Share dilution occurs because the additional shares reduce the value of the existing shares for investors.
A company issues bonus shares to increase liquidity of the stock and increase participation of investors. Secondly, the stock price drops to a reasonable range post a bonus issue, which makes it affordable for investors to purchase more shares.
Advantages Of Bonus Shares
It is beneficial for the long-term shareholders of the company who want to increase their investment. … Bonus shares increase the outstanding shares which in turn enhances the liquidity of the stock. The perception of the company’s size increases with the increase in the issued share capital.
Companies issue bonus shares to encourage retail participation and increase their equity base. When price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company. Increase in the number of shares reduces the price per share.
The disadvantages of issuing bonus shares are:
- To the company – as issue of this may lead to increase in capital of the company.
- Shareholder expect existing rate dividend per share to continue.
- It also prevents the new investors from becoming the shareholders of the company.
How is bonus issue calculated?
Bonus shares are issued to each shareholder according to their stake in the company. For example, a 3 for 2 bonus issue would entitle each shareholder 3 shares for every 2 shares already held by them before the issue. e.g. A shareholder having 1000 shares would therefore receive 1500 bonus shares (1000 x 3 ÷ 2).
Bonus
| COMPANY | Bonus Ratio | DATE |
|---|---|---|
| APL Apollo | 1:1 | 16-09-2021 |
| Kanpur Plast | 1:2 | 15-09-2021 |
| Mahindra Life | 2:1 | 14-09-2021 |
| Mahindra Holida | 1:2 | 08-09-2021 |
No, a company cannot issue Bonus Shares to other than existing shareholders, It can only issue bonus shares to the members/shareholders whose names appear in Register of Members on the record date: Q. 4 Can a company issue partly paid up Bonus Shares? Ans.
A rights issue is one way for a cash-strapped company to raise capital often to pay down debt. Shareholders can buy new shares at a discount for a certain period. With a rights issue, because more shares are issued to the market, the stock price is diluted and will likely go down.
Does issuing stock increase stock price?
Value Neutrality
The capital raised from the new share issuance increases the total market capitalization of the stock, but the value of the stock per share remains unchanged. As new shareholders have paid a fair value for the stock, there is no value redistribution to existing shareholders.
In the stock market, when the number of shares available for trading increases as a result of management’s decision to issue new shares, the stock price will usually fall.
Stock prices change everyday by market forces. … If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.