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Sunday, May 8, 2016

Bonus Share Issue

 
 
Earlier this year, the government had asked cash rich PSUs like Coal India to provide investors with bonus shares.

Here is what investors should know about it

1. What is a bonus share issue?

In a bonus share issue, a company distributes shares to existing shareholders in proportion to the shares they already own. Investors receive these shares at no addi tional cost.

2. Why does a company come out with a bonus share offer?

Companies usually come out with bonus shares to reward existing share holders. Also, bonus shares improve the li quidity of the stock as it increases the number of outstanding shares.Since a bonus share issue leads to the stock price falling, investors -main ly retail -tend to show interest in it.

3. What are the mechanics of a bonus share offer?

If a company decides to come out with a 2:1 bonus, then for every share that a shareholder owns, heshe will get two more for free.So, if an investor has 100 shares, then hisher stake in the company will increase to 300 shares.

4. What is the impact of bonus shares?

As the number of shares in creases, the price of the share goes down but the market capitalisation remains the same. This means the number of shares you hold goes up, while value of share comes down. It is similar to splitting a Rs 100 note to two Rs 50 notes. While profits or revenues do not change, it impacts returns ratios like earnings per share (EPS), which could shrink because there is a new set of shares that has hit the market

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