Samin Gurung, Sharesansar Media Officer, contributed to this article.
After only a short period of time, an amateur investor dabbling in the secondary market becomes overwhelmed by the buzz of bonus dividend announcements and the excitement that arises among investor circles.
It is thus embedded in the conversation that a bonus dividend declaration is a positive development for the company and its shareholders, and that the larger the proportion of the dividend declared, the better for both.
However, there are a number of aspects of the bonus dividend announcement that make it difficult for an inexperienced investor to see the broad picture and connect the various dots. The fact that even experienced investors have misread it in part just adds to the difficulty of the situation. In this regard, this article is written for the novice investor who has recently entered the secondary market, perhaps during the bull market that began a year earlier. This essay, on the other hand, can be used by experienced investors to compare their own understanding of the subject and to determine whether or not they have everything correct.
1) The first item is intended to cover the fundamentals.
To begin with, a bonus share declaration is a method for corporations to compensate their shareholders for their investment. Companies may elect to pay a portion of their profits to shareholders in the form of cash dividends. However, there are restrictions on how much cash can be distributed by a firm. Furthermore, from the perspective of value investment, it is acknowledged that a firm that decides to share all of its profits in cash is a corporation that does not know what to do with its money. According to common sense, a company’s profits should be re-invested in order to grow larger, better, and more efficient.
When it comes to bonus shares, here is where the notion comes into play. It is possible for a firm to pay back its shareholders without giving them a cash deposit. Bonus shares are distributed in this manner. Suppose a firm decides to distribute bonus shares worth 20% of its total shares, meaning that a shareholder will have 20% more shares after the bonus declaration than he had when he purchased the shares originally.
If an investor owned 100 shares before to the proclamation of a 20 percent bonus, he will now have 120 shares in total after the bonus distribution is made available.
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