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What are the advantages of issuing Bonus Shares?
Although bonus shares do not increase the wealth of shareholders, it has certain advantages that make them more attractive than dividends. Some of the advantages of issuing bonus shares are mentioned below.
Tax Benefit
Bonus shares are not taxable, however dividends are. Shareholders like to get bonus shares which they may sell in the market or hold for capital gains.
The dividends obtained by shareholders are considered ordinary income. So, they need to pay income taxes that are larger than dividend share taxes. Therefore, the shareholders can sell bonus shares the taxes on which are less than general income tax. In this way, shareholders can save money in taxes.
Sign of Higher Future Profits
A company issues bonus shares to raise capital externally which means that it is growing. Thus, there is an indication of future profits of a company that issues bonus shares.
Issue of bonus shares without an increase in earnings will dilute the earnings of the company. That is undesirable for the firms and so, they issue bonus shares when there is a chance of future profit. Thus, shareholders may interpret bonus share as a sign of future profits.
Increase in Future Dividends
When bonus shares are issued along with the stability of dividends, the total value of shareholders’ income may increase. With the additional shares of a company, the dividend on extra shares will increase, and thus, companies may offer increasing dividends to the shareholders in the future.
Psychological Impact
The issue of bonus shares often has a positive psychological effect on the minds of shareholders. They can sell the extra shares in the market to raise their income. Moreover, it also has the advantage of having a favorable impression in the market when the company issues bonus shares. This psychological impact may increase the prices of shares in the market.
Effects of Bonus Issue on the Company
Apart from the above-mentioned positive effects for shareholders, the issue of bonus shares has some positive effects on the company too.
Conservation of Cash
The issue of bonus shares offers the companies a way to conserve the earnings while satisfying the desire of shareholders as well. By offering bonus shares, a company offers the shareholders the right to make earnings from capital gains while keeping the retained earnings for investment in other projects. Therefore, it is useful for the company to issue bonus shares to resolve the conflict between the company and the shareholders.
Only Means to Pay Dividends in Difficult Situations
A company may be in financial hardship that stops it from paying extra dividends to its shareholders. In such situations, issuing bonus shares may be the only way to fulfill the desires of the shareholders.
Making the Share Price More Attractive
Sometimes, the issue of newer shares acts as a share split, bringing down the price of the shares and making it affordable to small shareholders. This also increases the trading of the shares in the share market.
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