Sale of Fractional Shares That Arose Out of Bonus Issue

In the world of stock market investments, fractional shares have gained increased attention, especially in relation to bonus issues

In the world of stock market investments, fractional shares have gained increased attention, especially in relation to bonus issues. A bonus issue occurs when a company issues additional shares to its existing shareholders, typically in the form of free shares. These shares are issued in a specific ratio, such as 1:1 (one new share for every share held). While the process benefits shareholders by increasing the number of shares they hold, it can also create fractional shares in certain cases.

What Are Fractional Shares?

Fractional shares are portions of a whole share, which occur when the bonus issue does not result in an integer number of new shares for every shareholder. For instance, if a company declares a 1:2 bonus issue, shareholders will receive one new share for every two shares they already own. In cases where a shareholder has an odd number of shares, the result might not be a whole number of shares. The leftover fraction is called a fractional share.

Fractional shares cannot typically be traded or sold individually on the open market because most exchanges require full shares to be bought or sold. This creates a unique situation for shareholders who receive fractional shares as part of a bonus issue.

The Sale of Fractional Shares

To address the issue of fractional shares arising from bonus issues, companies or brokers often step in to facilitate the sale of these fractional shares. Here's how it works:

1. Conversion to Cash: In most cases, instead of holding onto fractional shares, shareholders are offered the option to sell them for cash. The company or broker will calculate the cash value of the fractional shares based on the market price of the stock. This ensures that shareholders receive the fair value for the portion of the share they own.
2. Facilitating the Sale: The sale is typically executed through the company or its brokerage partner. Shareholders who have fractional shares can either elect to sell them directly to the company or broker or can have the fractional shares pooled together to form full shares that are then sold on the market.
3. Tax Implications: The sale of fractional shares may have tax implications, as any gain from the sale is considered taxable income. Shareholders should be aware of the potential tax liabilities involved in selling fractional shares.

Benefits of Selling Fractional Shares

1. Immediate Liquidity: By selling fractional shares, investors can quickly access cash instead of being left with a portion of a share that cannot be traded independently.
2. Simplified Process: The sale of fractional shares is typically handled by the company or a designated broker, removing the need for shareholders to navigate complex trading processes on their own.
3. Fair Compensation: Shareholders are compensated for their fractional shares based on the current market value, ensuring that they are not left with an untradeable asset.

Conclusion

The sale of fractional shares arising from a bonus issue offers a convenient solution for investors holding small portions of shares that cannot be easily traded. It ensures that these fractional holdings are converted into liquid assets, allowing shareholders to realize the value of their holdings without the complications of owning incomplete shares. This process adds an extra layer of convenience to bonus issues, making them a more attractive option for companies to distribute additional shares to their shareholders.

Disclaimer: The article is for informational purposes only and not investment advice.