A companyโs capital is divided into smaller shares of the actual price and offered to the public for sale to raise funds from the market.
Through investing in the stock market, investors become shareholders of any given company by purchasing specific stocks.
As a result, the investors are updated occasionally about the companyโs decisions and an update on the right shares and bonus shares.
Key Takeaways
- Rights shares are new shares issued to existing shareholders at a discounted price, while bonus shares are additional shares given to shareholders for free based on their current holdings.
- Rights shares allow companies to raise additional capital from existing shareholders, whereas bonus shares capitalize a portion of the companyโs reserves without raising new money.
- Rights shares can be traded or transferred, giving shareholders flexibility, while bonus shares are non-transferable and must be held by the existing shareholder.
Right Shares vs Bonus Shares
Rights shares are new shares of stock that are issued by a company to its existing shareholders, ย in proportion to their existing holdings. Bonus shares are additional shares of stock that are issued by a company to its existing shareholders, but are not sold for cash.
Right shares require a minimum subscription, but bonus shares do not require a minimum subscription.
Comparison Table
| Parameter of Comparison | Right Shares | Bonus Shares |
|---|---|---|
| Purpose | The aim is to raise additional capital for the company. | The aim is to bring the share price down. Also, they issued alternative dividend payments to stakeholders. |
| Price | Price is issued at discounted prices. | Price is issued to stakeholders free of cost. |
| Minimum Subscription | Requires minimum subscription. | Does not require a minimum subscription. |
| Creation and Renunciation | Created from additional shares and renounced either partially or fully. | Created out of a companyโs profit and lack of renunciation options. |
| Share Price | The share price is affected if the shareholders sell the shares to the open market. | It lowers the share price according to the proportion. |
What are Right Shares?
Right shares are shares issued to existing shareholders equal to their holdings within a specified period, with the company aiming to raise more capital from the market.
The company notifies its shareholders of their chance to trade the right shares with shareholders required to inform the company of their decision.
Notably, the rights are transferable; hence, shareholders can decide on whether to purchase or sell off their rights in the open market to other investors, either partially or wholly.
What are Bonus Shares?
On the other hand, bonus shares are issued to an existing companyโs shareholders based on specific proportions of their holdings and offered at an accessible cost.
The bonus shares are a conversion of the accumulated earnings by a company given in the form of free shares and not in dividend form.
Notably, the bonus shares inject no new capital into the company making the companyโs net worth remain the same. However, shareholders can sell their shares to make quick profits or preserve them for future gains.
Main Differences Between Right Shares and Bonus Shares
While the two terms are closely related, they have significant differences. Foremost, the right shares are available to the existing shareholders equal to their holdings that can be brought at a permanent price within a defined timeline.
However, the firm only issues the bonus shares free of cost to the existing shareholders. Still, they are given according to their holdings out of accumulated profits and reserves.
The other differences are their purpose, price, creation and renunciation, minimum subscription, and share price.
The following discusses the critical differences between right and bonus shares.
Purpose
A company offers the right shares in a quest to raise additional funds for the firm from the market. Companies use the raised funds to acquire assets, repay debts, corporate expansion, and take over, among other activities.
Right shares are a better escape for companies from the fangs of high-interest bank loans.
On the other hand, a company offers bonus shares to increase active trading by increasing the outstanding number of the companyโs shares in the market.
Bonus shares are known to bring the market price of the companyโs shares within an attractive range. Bonus shares also are key in helping the company avoid cash outflows in the form of dividends.
Price
While the right shares are issued at discounted prices, the bonus shares are issued free of charge. The discounted prices while offering the right shares mean that the shares are offered to shareholders at a price lower than the market price.
Notably, the right shares are either partially or fully paid up.
However, this depends on the proportion of the paid-up value of equity shares in case further issues occur. On the other hand, unlike the right shares, the bonus shares are always fully paid up.
Minimum Subscription
While purchasing the right shares, you must meet the minimum subscription stipulated by the company.
The mandatory minimum subscription follows the companyโs objective by providing the right shares, and generating additional capital.
On the other hand, bonus shares require no minimum subscription from shareholders.
Creation and Renunciation
The right shares are those created by a company to raise additional funds. Notably, the right shares can be renounced partially or fully.
On the other hand, bonus shares are created out of profits and reserves accumulated by a company. Unlike the right shares, bonus shares have no renunciation options.
Share Price
When it comes to the right shares, the share price might plunge due to the sale of the right shares to the open market, whose price is always discounted.
Additionally, it sends an alert to the market that the subject company might be in trouble and might require finding new capital.
On the other hand, the dilution of bonus shares will decrease the share price for a short period. In most cases, the investors are likely to lose or gain nothing during the dilution of the bonus shares.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
