What are Bonus Shares?
Bonus shares, often referred to as stock dividends, are a mechanism through which a company allocates additional shares to its existing shareholders without necessitating any monetary payment from them. The primary purpose of issuing bonus shares is to reward shareholders, typically when the company has accumulated profits or reserves that it wishes to share among its investors without depleting its cash reserves. These additional shares are funded from the company’s retained earnings or capital reserves, resources that have accrued over time from its profits.
The distribution of bonus shares is typically done in proportion to a shareholder’s existing ownership, ensuring that each investor receives a number of bonus shares equivalent to their current holdings.
Although bonus shares augment the total number of shares held by shareholders, they do not alter their ownership percentage in the company. Consequently, the market price per share often decreases after the issuance of bonus shares, as the overall share count increases without a corresponding increase in the company’s assets. However, shareholders maintain their usual rights, such as attending meetings and voting on corporate matters, and remain entitled to any future dividends or bonus shares that the company might issue.
The distribution of bonus shares is typically done in proportion to a shareholder’s existing ownership, ensuring that each investor receives a number of bonus shares equivalent to their current holdings.
Although bonus shares augment the total number of shares held by shareholders, they do not alter their ownership percentage in the company. Consequently, the market price per share often decreases after the issuance of bonus shares, as the overall share count increases without a corresponding increase in the company’s assets. However, shareholders maintain their usual rights, such as attending meetings and voting on corporate matters, and remain entitled to any future dividends or bonus shares that the company might issue.
What are Right Shares?
Right shares, also known as preemptive rights or subscription rights, represent an opportunity offered by a company to its existing shareholders to purchase additional shares before these shares are made available to external investors. This mechanism is designed to enable current shareholders to maintain their proportional ownership in the company or, if they choose, to invest more capital in the organization.
The fundamental purpose of right shares is to safeguard the ownership interests of existing shareholders by affording them the first opportunity to subscribe to new shares, usually at a discounted price compared to the market rate. Shareholders are not obliged to exercise these rights; they can choose to buy the additional shares or sell their rights in the open market. This mechanism is often employed when a company needs to raise additional capital or issue more shares, and it wants to give its existing investors the chance to participate in the capital expansion.
Consequently, right shares empower shareholders by allowing them to make informed decisions about their investment in the company. If shareholders decline to exercise their rights, the unclaimed shares are typically offered to external investors. The market price per share can be influenced by the pricing of right shares and the overall perception of the company’s financial health. In essence, right shares offer a way for existing shareholders to maintain or enhance their ownership stake in the company while providing flexibility in their investment decisions.
However, they serve different purposes and are implemented in distinct ways:
The fundamental purpose of right shares is to safeguard the ownership interests of existing shareholders by affording them the first opportunity to subscribe to new shares, usually at a discounted price compared to the market rate. Shareholders are not obliged to exercise these rights; they can choose to buy the additional shares or sell their rights in the open market. This mechanism is often employed when a company needs to raise additional capital or issue more shares, and it wants to give its existing investors the chance to participate in the capital expansion.
Consequently, right shares empower shareholders by allowing them to make informed decisions about their investment in the company. If shareholders decline to exercise their rights, the unclaimed shares are typically offered to external investors. The market price per share can be influenced by the pricing of right shares and the overall perception of the company’s financial health. In essence, right shares offer a way for existing shareholders to maintain or enhance their ownership stake in the company while providing flexibility in their investment decisions.
However, they serve different purposes and are implemented in distinct ways:
Basis of Comparison | Bonus Shares | Right Shares |
Purpose | Bonus shares are issued as a reward or gesture of goodwill to existing shareholders, often in lieu of cash dividends. They are given when a company has accumulated profits or reserves that it wants to distribute to shareholders without depleting its cash reserves. | Right shares are issued to existing shareholders to provide them with the opportunity to purchase additional shares at a specified price before the company offers those shares to external investors. This helps existing shareholders maintain their ownership percentage in the company if they choose to exercise their rights. |
Source of Funding | Bonus shares are not funded by the shareholders; instead, they are typically issued out of the company’s retained earnings or capital reserves. | Shareholders have to invest additional capital to purchase right shares if they decide to exercise their preemptive rights. |
Proportional Distribution | Bonus shares are distributed to existing shareholders in proportion to their existing shareholdings. For example, if you hold 100 shares and the company issues a 1:1 bonus, you’ll receive an additional 100 shares. | Right shares are typically distributed in proportion to a shareholder’s existing ownership in the company. For instance, if you hold 10% of the company’s shares, you will have the right to purchase 10% of the new shares being issued. |
Impact on Ownership and Market Price | Bonus shares increase the number of shares held by shareholders but do not change their ownership percentage in the company. Consequently, the market price per share usually decreases after the issuance of bonus shares, as the total number of shares increases without a corresponding increase in company assets. | Right shares allow existing shareholders to maintain or increase their ownership percentage in the company. If they choose not to exercise their rights, the shares are usually offered to external investors. The market price per share may be influenced by the pricing of the right shares and the market’s perception of the company’s financial health. |
Conclusion
Bonus shares are given as rewards by companies to existing shareholders, increasing share numbers but not ownership percentages. Right shares provide current shareholders the first chance to buy additional shares, protecting their ownership stake during capital expansion. Understanding these differences is vital for informed investment decisions and capital allocation.