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difference between right shares and bonus shares

For investors hoping to take part in the expansion of different enterprises, the Nepalese stock market offers a multitude of investment options. Investors need to understand the concept of “Bonus Shares” and “Right Shares” while involved in the share market. Both entail the issuance of fresh shares, but they have different goals and affect shareholders in different ways. In this blog, we will understand the bonus shares and the difference between bonus shares and right shares.

What are bonus shares?

Bonus shares are free shares given to current owners based on the amount of shares they currently own. These shares promote long-term investment and serve as a reward for loyalty. Bonus shares are subject to SEBON laws and the Securities Act, just as right shares

A SEBON approval is required before bonus shares are issued. Businesses in Nepal provide bonus shares to reward customers for their loyalty, improve market sentiment, and boost liquidity by increasing the total number of shares in circulation.

What is the impact of bonus shares?

Dilution: As the total number of shares rises, bonus shares, like right shares, cause dilution of current shareholder ownership.

Market Price: Because of the additional liquidity, the short-term impact on the market price is often neutral or slightly positive. Market conditions and the company’s performance will determine the long-term effects.

No Subscription: Bonus shares are distributed without charge, and owners are not given the choice to sell or subscribe to them. Shareholder accounts are automatically credited with them.

Let’s say a Nepali business announces a 2:1 bonus share offering. A shareholder who owns 150 shares at the beginning of the bonus share issuance is entitled to an additional 300 shares at no further cost. Consequently, the bonus share allocation causes their overall holding to increase to 450 shares, essentially tripling.

Difference between bonus shares and right shares?

The difference between bonus share and right share is tabulated below:

FeatureRight SharesBonus Shares
PriceDiscountedFree
PurposeRaise capitalReward loyalty, improve market sentiment
SubscriptionOptionalNot applicable
Dilution effectYesYes
Market impactCan initially depressNeutral or slightly positive
RegulationsSEBON approval requiredSEBON approval required

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FAQs

What are bonus shares, and how do they differ from right shares?

Bonus shares are free shares given to existing shareholders based on their holdings. They reward loyalty and boost liquidity. Unlike right shares, they don't require a subscription and are automatically credited to your account.

What are the impacts of bonus shares?

Similar to right shares, they lead to slight ownership dilution. The market price may remain neutral or slightly increase due to added liquidity. Long-term effects depend on the company and market conditions.

Which is better, the right shares or bonus shares?

Is bonus share good or bad?

Bonus shares can be beneficial as they increase shareholder ownership without requiring additional investment and can signal confidence in the company's performance. However, they can also dilute existing shareholders' ownership and may indicate a lack of cash reserves for dividends. Ultimately, the perception of bonus shares depends on individual investor preferences and the company's specific circumstances.

Conclusion

Making wise investment decisions requires an understanding of the right shares and bonus shares in the context of the Nepalese market. Both approaches entail the issuing of additional shares, but they must be carefully considered due to their differing goals, effects, and legal requirements. 

Investors can strategically manage the Nepalese stock market by understanding the key distinctions and potential repercussions and making decisions that align with their investing objectives. A company’s financial structure is greatly influenced by both right shares and bonus shares, therefore investors should consider these factors while constructing a diversified portfolio.

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