A bonus share is a type of stock that is awarded directly from a company to an investor in the company. This essentially amounts to an individual being able to get a free share of stock in the company. When a company issues bonus shares, the individual does not have to pay anything for them. In addition, there are no stockbroker commissions or any other fees to worry about. Most of the time, the number of bonus shares that are received by an investor are based on the number of shares that are already own in the company. Stockholders you have a large number of shares are going to receive more bonus shares than stockholders to have only a few shares in the company. 

Classes of Stock

In most cases, bonus shares will be awarded to only a specific class of stock. For example, if a company has shares of preferred stock and common stock, they might decide to issue bonus shares only to the common stockholders. This is decided by the board of directors in the company, or the company bylaws. 

Benefits

One of the primary benefits of receiving bonus shares is that you get to increase your investment without actually investing any money. The company will basically send you free shares of stock in the company. This is generally looked at as an incentive to shareholders in the company. Companies decide that they want to reward the individuals who have stood by them all along. The company then issues additional shares into the market place and provides them to the existing shareholders of the company first.

Dilution

Even though the individual investor is receiving free stocks, this can also have a negative impact on all of the investors overall. Since the company is introducing more shares of stock into the market place, this can have the effect of diluting the value of the shares of stock in the market place. 

The actual value of the company is not increasing simply because they issue more shares of stock. Instead, they are increasing the number of outstanding shares while keeping the earnings the same. This has the effect of decreasing the amount of earnings-per-share, and in turn, the value of the stock. Because of this, many investors have mixed emotions about bonus shares. They like to be able to receive free shares of stock without paying any commissions to a broker for them. However, at the same time, they do not like the fact that the price of all of their stocks may be decreased in the market place because of dilution. 

In the long run, this is usually going to help the investor because the short-term price decrease in the market will go back up again. Once the value increases, the investor will have more shares in the company.

blog comments powered by Disqus
Scottrade