Suppose you want to open a shop of kid's garment for premium segment.
And total investment is Rs 20 lacs. You have only Rs 10 lacs take Rs 10 lacs from your friends as capital, rather than loan.
When you give share capital to others it means they will have equal profits as per their proportion of share capital.
After 3 years of start you have earned Rs 20 lacs profits in last 3 years. Now you feel you should give back some profits to your shareholders as reward.
Option 1 - Dividend- First option is to pay them profits in cash which technically means giving dividend. But this has one problem. You have to take cash from the business and pay out. If you want to pay complete Rs 20 lac's as dividend,you have to take 20 lac's out of business and pay. banks will also not lend to pay this.
Option 2- Bonus shares- Other option is you issue them more shares, but now without any money coming from them. They will get free shares as bonus.
Benefit of issuing a bonus share is that you will be not required to pay cash out of the business funds and your shareholders will also be happy as they have got more shares.
They will go to market and sell those bonus shares to anybody and encash the amount.
Many companies give bonus shares instead of dividends to save cash flow out of business on one side and rewarding shareholders on other side
Many times, when some company makes some non regular gains in any year, they normally go with this route of rewards.
There is no legal complusion to issue shares. Normally companies with good intentions to reward their shareholders in big manner, takes this stance
Ratio of bonus is directed by how many new shares a company wants to issue.
For example, a Company's Equity Capital comprises 1 Cr shares (of Rs. 10 each), and it wants to double the number of shares, it would issue a 1:1 Bonus.
If they want to quadruple the number of shares, it would issue a 3:1 Bonus. Some points to note:
1. A Bonus issue (in any ratio) does not increase a company's Net-worth (Capital plus Reserves). In a Bonus, part of reserves are used to issue new shares
2. A Bonus also does not increase the Market Capitalization (worth on markets). Of course, a Bonus is issued as a signal by company to market/investors that a company's prospects are good, and that often leads to gains in share price/market capitalization
3. A Bonus is different from a Split. In a split, the Face Value of a share is split (from say, Rs 1o to Rs 5). They effect of this on share price will be similar to that of a 1:1 Bonus.
4. In some markets (like in US), there is not concept of a Face Value. So, they do not have a concept of Bonus, but only Split.
Happy Learning and Investing!
And total investment is Rs 20 lacs. You have only Rs 10 lacs take Rs 10 lacs from your friends as capital, rather than loan.
When you give share capital to others it means they will have equal profits as per their proportion of share capital.
After 3 years of start you have earned Rs 20 lacs profits in last 3 years. Now you feel you should give back some profits to your shareholders as reward.
Option 1 - Dividend- First option is to pay them profits in cash which technically means giving dividend. But this has one problem. You have to take cash from the business and pay out. If you want to pay complete Rs 20 lac's as dividend,you have to take 20 lac's out of business and pay. banks will also not lend to pay this.
Option 2- Bonus shares- Other option is you issue them more shares, but now without any money coming from them. They will get free shares as bonus.
Benefit of issuing a bonus share is that you will be not required to pay cash out of the business funds and your shareholders will also be happy as they have got more shares.
They will go to market and sell those bonus shares to anybody and encash the amount.
Many companies give bonus shares instead of dividends to save cash flow out of business on one side and rewarding shareholders on other side
Many times, when some company makes some non regular gains in any year, they normally go with this route of rewards.
There is no legal complusion to issue shares. Normally companies with good intentions to reward their shareholders in big manner, takes this stance
Ratio of bonus is directed by how many new shares a company wants to issue.
For example, a Company's Equity Capital comprises 1 Cr shares (of Rs. 10 each), and it wants to double the number of shares, it would issue a 1:1 Bonus.
If they want to quadruple the number of shares, it would issue a 3:1 Bonus. Some points to note:
1. A Bonus issue (in any ratio) does not increase a company's Net-worth (Capital plus Reserves). In a Bonus, part of reserves are used to issue new shares
2. A Bonus also does not increase the Market Capitalization (worth on markets). Of course, a Bonus is issued as a signal by company to market/investors that a company's prospects are good, and that often leads to gains in share price/market capitalization
3. A Bonus is different from a Split. In a split, the Face Value of a share is split (from say, Rs 1o to Rs 5). They effect of this on share price will be similar to that of a 1:1 Bonus.
4. In some markets (like in US), there is not concept of a Face Value. So, they do not have a concept of Bonus, but only Split.
Happy Learning and Investing!
