Right Share Vs. Bonus Share: What Is The Difference?
INVESTOPAPER
What Is Right Share?
A right share, also known as a rights issue, is a process in which a company issues new shares of its stock to its existing shareholders. These new shares are offered to existing shareholders at a discounted price to the current market price.
The purpose of a rights issue is usually to raise additional capital for the company. By offering shares to existing shareholders, the company can raise money without going through the process of selling shares to new investors. Additionally, a rights issue can also help the company maintain its current ownership structure by giving existing shareholders the opportunity to maintain their proportional ownership in the company.
When a company announces a rights issue, eligible shareholders are given a specific period of time in which they can exercise their right to purchase the new shares. If a shareholder chooses not to purchase the new shares, they can sell their right to do so to another investor in the market.
What Is Bonus Share?
A bonus share, also known as a stock dividend, is an additional share issued by the company to its existing shareholders free of charge, based on the number of shares they already own.
A bonus share does not increase the total value of the company, but instead increases the number of shares outstanding, while reducing the value per share. The idea behind a bonus share issue is to reward existing shareholders for their investment in the company by providing them with additional shares at no cost.
For example, if a company announces a bonus share issue in the ratio of 1:1, it means that each shareholder will receive one additional share for every share they already own, effectively doubling the number of shares they hold. As a result, the market price of each share is likely to decrease, but the total value of the shareholder’s investment remains the same.
Bonus share issues are typically funded from the company’s reserves or profits, and they can be used as an alternative to cash dividends or to increase liquidity in the market for the company’s shares.
Difference Between Right Share & Bonus Share?
The main difference between a right share and a bonus share is that a right share is an offer of new shares at a discounted price to existing shareholders, whereas a bonus share is a free issue of additional shares to existing shareholders, without any cost.
Here are the key differences between right shares and bonus shares:
1. Purpose: A right share is issued to raise additional capital for the company, while a bonus share is issued to reward existing shareholders and increase the number of shares outstanding.
2. Cost: A right share is offered at a discounted price, which means that existing shareholders have to pay for the new shares. A bonus share, on the other hand, is issued for free to existing shareholders.
3. Proportion: A right share is issued to existing shareholders in proportion to their existing shareholdings. Similarly, a bonus share is issued to existing shareholders based on the number of shares they already own.
4. Value: A right share may affect the overall market value of the company, as new funds enter into the company through investment from shareholders. However, a bonus share does not increase the total value of the company, as it is distributed from the company’s profit or retained earnings.
5. Funding: A right share is funded through new money from existing shareholders. A bonus share is funded from the company’s reserves or profits, and does not require any additional capital from shareholders.
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