Bonus shares are extra shares that are given away without charge to an existing shareholder of a company. A company issues these shares as a way to share its profits with its shareholders. So, what are bonus shares? Bonus shares are issued about the shareholder’s existing shares in a specific ratio. Consequently, a demat account’s use of bonus shares is described below.
- Increase in the number of shares: An increase in the total number of shares owned by the shareholder occurs when a company issues bonus shares. A shareholder would receive 100 additional shares, for instance, if the company issued a bonus of 1:1 and the shareholder-owned 100 shares of the company. As a result, the shareholder will now own 200 shares altogether. A decrease in the price per share results from this increase in shares.
- No requirement for a cash outlay: One of the main advantages of bonus shares is that there is no financial outlay necessary on the part of the shareholder. Unlike dividends, which are deposited into shareholders’ bank accounts as cash, bonus shares are issued without any payment from the shareholder. While maintaining its cash on hand, enables the company to distribute its profits to its shareholders.
- Liquidity improvement: The shareholder’s shares may also benefit from a liquidity improvement from bonus shares. When a shareholder receives bonus shares, they may choose to sell the extra shares in the market, increasing the stock’s liquidity. The shareholders looking to buy or sell company shares may benefit from this liquidity.
- Market capitalization rises: Bonus shares are also beneficial for the company’s market capitalization. The market capitalization of a company is determined by dividing the total number of outstanding shares by the stock’s current market value. The number of outstanding shares rises when a company issues bonus shares, increasing the market capitalization of the business.
- Earnings per Share (EPS) Dilution: One of the drawbacks of bonus shares is that they may lower the company’s EPS. Dividend per share (EPS) is calculated by dividing the company’s net income by the total number of outstanding shares. When a business issues bonus shares, the total number of outstanding shares rises, which lowers EPS. This may harm shareholders who want a higher EPS.
- Reduction in dividends paid per share: When a company issues bonus shares, its dividends paid per share (DPS) are reduced. The dividend payout ratio (DPS) is calculated by dividing the total dividends paid by the total shares outstanding. As more outstanding shares are issued due to bonus shares, the DPS declines. This could have a bad effect on shareholders whose income is based on dividends.
In conclusion, bonus shares can affect a demat account in both positive and negative ways. While it expands the shareholder’s shareholding and boosts liquidity, it also dilutes EPS and lowers DPS. Diversification and better investment management concerning bonus shares are two benefits of multiple demat account. Bonus shares, on the other hand, are a great way for the business to distribute its profits to its shareholders while avoiding any cash outflow. Investors should therefore think carefully about the effect of bonus shares before making any investment decisions.
