Bonus Shares vs. Rights Shares

Attribute	Bonus Shares	Rights Shares
Definition	Additional shares given to existing shareholders without any cost	Additional shares offered to existing shareholders at a discounted price
Reason for Issuance	Rewarding existing shareholders	Raising additional capital
Cost	No cost to existing shareholders	Shares are offered at a discounted price
Proportional Allocation	Shares are allocated to existing shareholders based on their current holdings	Shares are offered to existing shareholders based on their current holdings
Shareholder Approval	Not required	Required
Impact on Share Price	Usually leads to a decrease in share price due to dilution	Usually leads to a decrease in share price due to dilution
Effect on Ownership	Does not change ownership percentage	May dilute existing shareholders' ownership percentage

Introduction

When it comes to investing in the stock market, there are various ways for companies to reward their shareholders. Two common methods are through bonus shares and rights shares. While both options provide additional shares to existing shareholders, they differ in terms of their issuance and purpose. In this article, we will explore the attributes of bonus shares and rights shares, highlighting their key differences and benefits.

Bonus Shares

Bonus shares, also known as scrip dividends or capitalization issues, are additional shares given to existing shareholders by a company without any cost. These shares are issued to reward shareholders and increase the number of outstanding shares without affecting the company's overall market capitalization. Bonus shares are typically distributed in proportion to the existing shareholding, meaning that shareholders receive additional shares based on their current ownership percentage.

One of the main advantages of bonus shares is that they enhance the liquidity of the stock. By increasing the number of shares available in the market, bonus shares can potentially attract more investors and improve trading volumes. Additionally, bonus shares are often seen as a positive signal by the market, indicating that the company is performing well and has the ability to distribute profits to shareholders.

Another benefit of bonus shares is that they can help in reducing the share price. Since the number of shares increases after the issuance of bonus shares, the price per share tends to decrease proportionally. This can make the stock more affordable for retail investors, potentially attracting a wider range of shareholders.

However, it is important to note that bonus shares do not result in any immediate financial gain for shareholders. While the number of shares held increases, the overall value of the investment remains the same. Shareholders only benefit when they sell the additional shares at a higher price in the future or receive dividends on the increased number of shares.

Rights Shares

Rights shares, also known as subscription shares, are new shares issued by a company to its existing shareholders at a discounted price. Unlike bonus shares, rights shares are not distributed for free. Instead, shareholders are given the right to purchase additional shares at a predetermined price, usually lower than the current market price.

The primary purpose of rights shares is to raise capital for the company. By offering shares at a discounted price, the company incentivizes existing shareholders to invest more money into the business. This additional capital can be used for various purposes, such as funding expansion plans, reducing debt, or financing acquisitions.

One of the key advantages of rights shares is that they provide an opportunity for existing shareholders to increase their ownership in the company. By purchasing additional shares at a discounted price, shareholders can increase their stake and potentially benefit from future growth and dividends. This can be particularly attractive for long-term investors who believe in the company's prospects.

Another benefit of rights shares is that they can be tradable in the market. Shareholders who do not wish to exercise their rights can sell their entitlements to other investors. This creates a secondary market for rights shares, allowing shareholders to monetize their rights even if they do not want to invest additional capital.

However, it is important to consider the dilution effect of rights shares. Since new shares are issued, the ownership percentage of existing shareholders decreases unless they exercise their rights. This dilution can impact the earnings per share and the voting power of existing shareholders. Therefore, shareholders need to carefully evaluate the potential benefits and risks before deciding whether to participate in a rights issue.

Conclusion

Both bonus shares and rights shares provide additional shares to existing shareholders, but they differ in terms of their issuance and purpose. Bonus shares are distributed for free to reward shareholders and increase liquidity, while rights shares are offered at a discounted price to raise capital for the company. Bonus shares enhance liquidity and reduce the share price, while rights shares allow shareholders to increase their ownership and potentially benefit from future growth. However, bonus shares do not result in immediate financial gain, and rights shares can lead to dilution. Ultimately, investors should carefully consider their investment goals and the specific circumstances of each offering before making a decision.