Benefits of a stock bonus issue

[100rabh]

I wanted to understand the concept of Bonus Issues. I have read multiple articles on internet and now I have a basic understanding of what a bonus issue is and how does it work. However, I still fail to understand how is it a reward for the investor ? People are saying it is like dividends and even better. This is what is not clear to me.

For ex: Considering Reliance approves 1:1 dividend. Any investor who has 100 RIL shares (at approx 3000) will then have 200 shares (at approx 1500). Total amount invested by investor is approx 300000.

If someone buys the RIL share after the issue, he can also get 200 shares by investing the same amount (approx 300000).

Nothing changes whether you invested before or after the issue. I got some stocks as free, but the stock price declined so overall nothing changed from the point of view of my money. On the other side, if I was given dividend, from a investor point of view, I would have my invested amount + some extra money (some of it would go in tax, still I would have got something extra).

I request someone to explain what am I missing here. How is it beneficial for me as an investor.

Is the so called benefit lies in the assumption that this will make the stock more accessible for people, more tradeable, more liquid etc. Hence the stock price MIGHT perform better. Is that all to it ?

[TitanTrader]

you are correct. nothing immediate in bonus, just some benefits in liquidity, future growth, investor perception and some (maybe) in ownership and voting rights.

[SG_13]

@100rabh

if I was given dividend, from a investor point of view, I would have my invested amount + some extra money (some of it would go in tax, still I would have got something extra).

Let’s start with Dividends, there is no extra money here, even when cash dividends are paid, on the ex-date, the stock price will drop to the extent of the dividend paid. So dividends will impact the share price, ultimately what you gained through dividend will be lost through decline in stock price, but this could be temporary and the stock price will bounce back or fall based on market conditions as usual…

@100rabh

Is the so called benefit lies in the assumption that this will make the stock more accessible for people, more tradeable, more liquid etc. Hence the stock price MIGHT perform better.

Thats pretty much it.

Bonus issues are also called “Stock Dividends”, as stocks are issued instead of paying cash.

Bonus actually uses the reserves to issue the additional shares at no incremental cost to the shareholders, this improves the demand (liquidity) of the stock, making it more accessible to more investors, which would benefit in the long-run through higher appreciation in the stock’s price

When it comes to Bonus issue, instead of paying the cash to the shareholders, the company can utilise the cash to fund it projects, the reserves are adjusted to the extent of bonus.

Although the market price changes, this is not a reduction in the price due to cash outflow like the dividends, rather this merely a price adjustment for the additional shares issued, keeping the total investment value unaffected.

In summary:

Dividends are paid when the company has no better use for such cash and the assumption is that shareholders can use this cash to generate better returns than the company through its investments.

For Bonus, the company is not willing to part with the cash, as it might have better use for it, but at the same time, it wants to reward its shareholders through additional shares, which naturally increases the demand for the share.

PS:

There is Stock split, which is similar to bonus, but this involves no reduction in the reserves or increase in the share capital, but rather the face value per share gets reduced, resulting in increase in the no.of shares.
(However, there is a limit to how many times a stock can be split, as the face value can’t be reduced below ₹1, i guess).

[Akash_Shah]

@100rabh

I request someone to explain what am I missing here. How is it beneficial for me as an investor.

You aren’t missing anything. Your understanding is perfect
There is no immediate reward for shareholder.

Only thing it signals is that in long term company feels business prospects are bright and hence they are reinvesting accumulated profits back in company, rather then taking it out as dividends.

@100rabh

Is the so called benefit lies in the assumption that this will make the stock more accessible for people, more tradeable, more liquid etc. Hence the stock price MIGHT perform better. Is that all to it ?

Again perfect. That is all

[neha1101]

I had the same confusion years ago as to why the word BONUS is used when the impact is NIL.

It was someone here who told me that the Bonus should be considered from the point of view of the Face value of the shares.

Assuming I have 1 RIL at 10 Rs Face Value ( original issue).
Now with the bonus issue I will eventually get 2 shares and the Face value remains the same at 10.

Based on the above it is defenetly a Bonus or a increase. This is the reason, the term bonus is used and should be looked at from the FV of the shares and not the market value of the shares.

I searched this forum to trace who advised me this, but could not find it. I believe it could be @Akash_Shah. Even if it is not, please confirm if the above logic is correct.

[Akash_Shah]

In case you are still interested in that conversation

Infibeam Bonus share

Well for an average investor, bonus and split will look one and the same, as number of shares increases, while keeping overall value same, but from accounting perspective there is a difference. For bonus issue, company uses it free reserves to transfer to equity. So in effect new equity capital is generated and distributed to shareholders by company. Why this are called as free shares? Because cost of aquisition of these bonus share is considered 0. (This is important only from taxation) You c…