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what is Bonus Shares

Investing in share market is gaining high importance nowadays. People are interested in the possession and selling of shares. Here arises the need to understand the various terms associated with shares. Bonus share is a term heard most commonly among the investors. Most companies are trying to issue bonus shares in the country. This shows the relevance of understanding the meaning of the term as it is highly beneficial to the investors.

Bonus share are given by a company to their share holders. These shares are given as bonus to the current share holders and they need not buy these shares. They need not pay any fees towards the possession of these shares. This give away of the bonus shares is dependent on the number of shares that the share holder possesses with the particular company. The company’s decision to issue bonus shares to the share holders is based on the qualifications met by the holder. When this is satisfied the company issues bonus shares to the qualified holder through a process called bonus issue.

There are several laws within the company that governs the issue of bonus shares. It is not that the company gives bonus shares to all sorts of shares. Only certain classes of shares are considered for bonus shares. There will be a fixed documentation with the company that affects the issue of bonus shares. Generally they try to give bonus shares only after their profit crosses certain basic value.

With the issue of a bonus share, the number of shares holds by the specific issuer increases. But the company value remains the same even after there are bonus shares issued by them. Hence it makes clear that the company has to cross certain profit level even before they are thinking to issue a bonus share. The bonus share only helps to increase the percentage of shares with a particular investor.

Bonus shares are given by certain companies as a means to reduce the tax paid by them. This is an effective tax saving mechanism by the company. They try to give one bonus share for each share hold by their investors. The investor need not pay any tax when he receives a bonus share. Here there is no income flow from the company to the issuer. It simply means that the issuer cannot be charged for the bonus share that he holds.

The issue and possession of bonus shares are helpful to both the investor and the company in a long run. In future, the bonus share holds a value. This means that the investor gets a profit for the share he is holding. At the same time, the company feels that they have crossed the minimum profit border. This helps them in their course of business in the future.

Posted by On 27/01/2010 Filed in: General Tags: , , ,
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