Difference Between Right Shares and Bonus Shares

A company’s capital is usually divided into smaller shares of definite price and offered to the public for sale in a quest to raise funds from the market.

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If  a bank thinks lending money  to a certain business is risky it will:

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Share capital is

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An 'Overdraft' is  where a business is permitted to overspend on its bank account up to an agreed limit.

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Through investing in the stock market, investors become shareholders of any given company through the purchase of specific stocks.

As a result, the investors are updated from time to time about the company’s decisions and an update on the right shares and bonus shares.

Right Shares vs Bonus Shares

The difference between Right Shares and Bonus Shares is that the right shares are issued to the shareholders at a discounted rate. Bonus shares are issued to the shareholders for free of cost. Right shares are always paid fully or partly, whereas bonus shares are always paid fully.

Right Shares vs Bonus Shares

Right shares require a minimum subscription, but bonus shares do not require a minimum subscription.

Comparison Table

Parameter of ComparisonRight SharesBonus Shares
PurposeThe aim is to raise additional capital for the company.The aim is to bring the share price down. Also, issued as alternative dividends payments to stakeholders.
PricePrice is issued at discounted prices.Price is issued to stakeholders free of cost.
Minimum SubscriptionRequires minimum subscription.Does not require a minimum subscription.
Creation and RenunciationCreated from additional shares and renounced either partially or fully.Created out of a company’s profit and lack renunciation options.
Share PriceShare price 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 aims to raise more capital from the market.

The company notifies its shareholders on their chance to trade the right shares with shareholders required to inform the company on their decision regarding the same.

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 shares issued to an existing company’s shareholders based on specific proportions of their holdings offered at a free 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 to the company making the company’s net worth remain the same. However, shareholders are allowed to sell their shares to make quick profits or preserve them for future gains.

bonus shares

Main Differences Between Right Shares and Bonus Shares

While the two terms are closely related, there are significant differences between them. 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 bonus shares are only issued by the firm free of cost to the existing shareholders, but they are given according to their holdings out of accumulated profits and reserves.

The other differences are found in their purpose, price, creation and renunciation, minimum subscription, and the share price.

The following is a discussion of the key differences between the right shares 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 in acquiring assets repayment of debts, corporate expansion, and takeover, among other activities.

Right shares are a better escape for companies from the fangs of high-interest bank loans.

On the other hand, bonus shares are offered by a company in a quest to increase active trading through the increase of the outstanding number of the company’s shares in the market.

Bonus shares are known to bring the market price of the company’s 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 take place. On the other hand, unlike the right shares, the bonus shares are always fully paid up.

Minimum Subscription

While purchasing the right shares, you will be required to meet the minimum subscription stipulated by the company.

The mandatory minimum subscription follows the objective of the company by the provision of the right shares which is the generation of additional capital.

On the other hand, bonus shares require no minimum subscription from shareholders.

Creation and Renunciation

The right shares are additional shares created by a company in a quest to raise additional funds. Notably, the renunciation of the right shares can be done 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 it might require to find new capital.

On the other hand, the dilution of bonus shares will bring the share price down for a short period. In most of the cases during the dilution of the bonus shares, the investors are likely to lose or gain nothing.

Difference Between Right Shares and Bonus Shares

References

  1. https://www.actuaries.org.uk/system/files/documents/pdf/0021-0090.pdf
  2. https://www.journals.uchicago.edu/doi/abs/10.1086/338747
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