The Indian stock market is characterized by emotions, analysis, and an overall ambition for making a fortune from the markets, more than anything else. If you are familiar with the manner in which the Indian markets operate, learn free finance course to know the fact that two major exchanges dominate this scene, namely, the National Stock Exchange (NSE), and the Bombay Stock Exchange (BSE), and are a large number of securities are traded through these exchanges daily
Now, you may be under the impression that there is only a single form of equity share that is available on the market, but that is simply not the case. If you are looking to enter the market, it is important to understand that there are a few different forms of shares that one would come across.
Here, we will be taking a look at what is bonus share, when they are issued, and the role that they play in the Indian stock market.
What is a share?
Before we can understand what is bonus share, it is important to understand the meaning of an equity share. Well, when it comes to a company, there are a few different methods by which it can raise the necessary capital needed for running or expanding the business operations. It can either issue bonds or other debt instruments, they can finance the expansion from its coffers, or offer a portion of its overall company to others to invest in, which in other words, means that one can buy a share of the company for money.
These shares help the company raise the necessary capital for their operational and business requirements, and these shares are traded through the stock exchanges, where one can buy these shares from.
The prices at which we buy these shares from the share market, or the secondary market, is the market price of the said share, whereas the actual value of the share is referred to as its face value. Several factors work in tandem to move the prices of the shares like the overall demand, growth potentials, increased earnings, etc. The difference in these price changes helps us make a profit or suffer a loss.
What is bonus share?
When a company earns a profit, there are a few ways in which it may decide to utilize it. They can either use it to reinvest in their operations, thereby supercharging the growth of the company in the future, or they may decide to distribute the excess profits among their shareholders in the form of dividends. Now, there are two ways in which they can decide to disburse these dividends.
- They can either go for cash transfers.
- They can pay them via bonus shares.
Bonus shares are shares that are issued to existing shareholders, in a particular ratio against the number of shares that they already possess in their portfolios. Usually, a ratio of 2:1 means that the shareholder would be delivered one bonus share for every two shares that they have in their portfolio. This means, that if a person owns 100 shares of a company on the record date, then they would be entitled to receive a total of 50 bonus shares, in the ratio of 2:1.
Now that you are aware of what is bonus share, you must be clarified regarding the difference between bonus shares and stock splits. Well, a stick split is a situation in which a company divides an existing share into equal portions, thereby resulting in an overall increase in the number of shares, a drop in the face value of the share, and its market price as well.
As an example, imagine a single share as a full pizza that hasn’t been divided. Now, when a company decides to cut the pizza into 10 equal pieces, each piece becomes its own single unit. Similarly, if a share of Rs. 10 is split into 10 portions, then the face value of the share would drop to Rs.1 per share, and the market price of the share would come down in the same percentage as well. A stock split is usually done with the motive of making the shares more lucrative for the people to purchase, something that we recently witnessed in the case of Tata steel and Diligent industry shares.
The significance of bonus shares in the context of the Indian stock market is immense. They help companies make their shares lucrative to the retail shareholders, and this drives up participation in the said shares as well. On the investor side of things, they help meet liquidity needs, as they can be sold off for the associated returns.
It is simple economics, that when supply goes up, prices come down, thereby a bonus issue may drive down the prices of the shares. This helps increase the company’s equity base. Some of the Indian stock market companies that recently announced bonus issues are FSN E-Commerce Nykaa, Punit comm, etc.
The issue of bonus shares as dividends helps preserve the company’s cash reserves, as well as improve the shareholder’s overall portfolio.
What is bonus share is something that you must know if you want to invest in the Indian markets. These shares play a critical role in the overall ecosystem, and as investors, one must always watch out for these shares as and when they are issued. By norm, they would be credited directly to your Demat account after the necessary time period.