Bonus Shares vs. Share Buybacks
A clear, professional guide breaking down two of the most popular corporate actions and how they uniquely impact your investments.
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What Are Bonus Shares?
Bonus shares are additional shares given to the current shareholders completely free of cost. Instead of paying out a cash dividend, a company with large cash reserves might transfer that cash into the equity pool and issue new shares to represent it.
The Major Impacts:
- âYou own a larger quantity of shares.
- âThe stock price drops to adjust the ratio.
- âImproves market liquidity by making individual shares cheaper.
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What is a Share Buyback?
A Share Buyback occurs when a company uses its excess cash to purchase its own shares off the open stock market, effectively "destroying" them. This reduces the total supply of shares floating in the market.
The Major Impacts:
- âReduces share supply, often pushing the price up.
- âArtificially boosts Earnings Per Share (EPS).
- âSignals to the market that management thinks the stock is undervalued.
Summary of Differences
| Action | Bonus Issue | Share Buyback |
|---|---|---|
| Total Share Count | Increases dramatically | Decreases (shrinks supply) |
| Cost to Company | No actual cash outflow | Spends massive amounts of cash |
| Effect on EPS | Decreases EPS | Increases EPS |
| Investor Sentiment | Excitement due to extra shares | Highly positive price signals |