Companies listed in the stock market provide their investors which different kinds of incentives when they make significant profits. These incentives are in the form of dividends and bonus shares. Generally, most companies distribute a portion of their profit to their investors in the form of dividends. However, on facing liquidity issues, even after having a profitable turnover, instead of paying out dividends, companies may prefer to issue additional shares to their existing shareholders without any additional cost.
Bonus shares are the shares that the existing shareholders of a company are eligible to get without paying any additional charges. These shares are issued only when companies make decent profits in a particular quarter. Bonus shares are also a good way for companies to show their investors that they are having a positive growth and attract new investors. Shareholders can choose to transact these additional shares in the secondary market if they wish to meet their liquidity requirements from the shares.
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Companies issue bonus shares in proportion to the number of shares held by the existing shareholders. For instance, if a company declares a bonus share at 5:1, then each investor will get five new shares for each share of the company that they own. So if someone has 10 shares of a company, after the issue of bonus shares, they will have 50 additional shares.
A shareholder of the company who has owned shares of the company, which are brought before the record date and the ex-date, will be eligible for the bonus shares. The difference between the ex-date comes two days before the record date because the Indian stock market follows a T+2 settlement cycle for the delivery of shares. Therefore, if an investor buys the company's shares on the record date, they will not be eligible for the bonus issue. To clarify things, let's understand what record date and ex-date are.
The record date is the date the company decides as the cut-off date for an investor to be eligible for the bonus shares. This means that shareholders who have the company's shares in the DEMAT account before this date will be eligible to receive bonus shares.
Ex-date falls one day before the record date set by the company. So, to be eligible for the bonus share, an investor must buy the share at least one day before the ex-date.
An investor who is eligible for the bonus share gets the bonus share in their account fifteen days after the ISIN or International Securities Identification Number is issued for the bonus shares issued to them. The shares will get credited to the DEMAT account of the person.
There are numerous benefits that an investor gets from the bonus share, such as follows -
A company issues bonus shares primarily to showcase its consistent growth and attracting retail investors.
Some of the other reasons are as follows:
So next time you come across any announcements regarding the issue of bonus shares, to avail of the benefit, check the ex-date and record date before investing. Furthermore, check your DEMAT account regularly for new shares to keep track of the credit of bonus shares.