In case of stock markets listed companies often reward its shareholders through an issue of additional stocks or shares through bonus issue and rights issue and as far as the investor is concerned he or she should know both terms as he or she will encounter bonus or right issue at least once during his or her investment lifetime. In order to understand both terms better one should know the difference between bonus issue and rights issue –
Bonus Issue and Rights Issue Differences
Meaning
Rights issue refers to that issue in which company gives rights to their existing shareholders to purchase shares of the company at a discounted price to the market price for a limited time period while bonus issue refers to that issue in which company gives shares free of cost to its existing shareholders in proportion of their holdings.
Costs
In case of rights issue although shares are issued at a discounted price to the shareholders the shareholders have to buy shares which involves costs but as far as bonus issue is concerned the shareholders get those shares for free and hence there are no additional costs involved as far as shareholders are concerned.
Reason for Issuance
The reason behind rights issue is that company wants to infuse fresh capital into the company which may be used by the company for expansion of business of the company while bonus shares are issued by the company when the company has made good profits. In simple words, a bonus issue is created out of reserves of the company so as to reward the shareholders of the company.
Example
An example of right share is suppose company comes with 1:5 rights issue and you have suppose 1000 shares than as a shareholder you can buy 1 share for every 5 share held that is you can buy 200 shares from the company at discounted price while an example of bonus share is suppose a company comes with 1:1 bonus issue and suppose you have 1000 shares than as a shareholder you will get 500 shares free of cost.
Not Compulsory to Buy
In case of rights issue it is up to shareholder whether he or she wants to subscribe to rights issue and he or she may fully or partially renounce their rights but as far bonus issue is concerned every shareholder will get bonus shares in proportion to shares held by him or her in the company and there is no question of shareholder renouncing his or her right.
Dilution of Shareholders ownership
In case of the rights issue, it results in dilution of ownership of the current shareholders while in case of bonus issue there is no such dilution in ownership of the shareholders as every shareholder gets bonus shares in proportion of their shareholding.
Effect on Stock Price
In case of rights issue there is little effect on the stock price of the company issuing rights shares but as far as bonus issue is concerned after the record date of bonus issue the share price reduces according to the proportion in which bonus shares are issued. Hence for example, if the company has announced 1:1 bonus issue and stock price is $1000 than after bonus issue the stock price will reduce to $500.
As one can see from the above that there are many differences between bonus issue and rights issue and that is the reason why as an investor you should know both the terms as it will be very helpful in taking the decision about your investments in any listed company in stock markets.