What is Bonus Share and How Does It Work?  

What are Bonus Shares?  

Bonus shares are additional shares that a company gives to its existing shareholders for free. Companies issue bonus shares for several reasons, including: Rewarding shareholders, Attracting new investors to invest in particular companies, Increasing liquidity, Demonstrating financial health, and Capitalizing on reserves.   

Here's what you need to know:  

1. They're issued in proportion to the shares you already own.  

2. You don't have to pay anything to receive them.  

3. They're a way for companies to reward their existing shareholders.  

How do Bonus Shares Work?  

Process for Bonus share issue  

1. The company decides to issue bonus shares as per the board meeting.  

2. They announce the bonus ratio (e.g., 1:1 or 2:1).  

3. A record date is set to determine eligible shareholders.  

4. New shares are created and distributed to new investors.  

The Bonus Ratio Explained:-  

The bonus ratio tells you how many extra shares you'll get. For example:  

1. A 1:1 ratio means you get one bonus share for every share you own.  

2. A 2:1 ratio means you get two bonus shares for every share you own.  

3. A 3:1 ratio means you get three bonus shares for every share you own.  

What is the Impact on Share Price?  

When a company issues bonus shares, the stock price usually adjusts downward. Don't panic! This is normal because:  

1. The company's value stays the same, with no change in company value.  

2. There are now more shares for new investors.  

3. Your total investment value doesn't change.  

Calculation for Bonus share:-  

1. If the bonus is allotted ratio of 1:1 and the share price is 100 and you have 500 shares of the bonus-issued company then you get more 500 shares (Now total shares are 1000) but the share price will drop 100 to 50.  

             After bonus issue ratio 1:1 = 500+500= 1000 shares and Share price 100/2=50  

             You have total shares of 1000, Share price of 50 means your current investment =1000*500=50000         
             (Rs 50000 is your investment)  

Your investment after receiving bonus shares 1000  X share price 50=50000  

2. If the bonus is allotted ratio of 3:1 the share price is 100 and you have 500 shares of the bonus-issued company then you get more than 1500 shares but the share price will drop 100 to 25.  

You have total shares of 500, Share price of 100 means your current investment =500*100=50000 (Rs 50000 is your investment)  

After bonus issue ratio 3:1 = 500+500+500+500= 2000 shares and Share price 100/4=25  

Your investment after receiving bonus shares 2000*share price 25=50000  

Why do Companies Issue Bonus Shares?  

1. To make their shares more affordable and attractive to small investors.  

2. To increase the number of shares in circulation, which can improve liquidity.  

3. As an alternative to cash dividends when the company wants to conserve cash.  

What are the benefits for Shareholders?  

1. It increases the number of shares you own without any extra cost.  

2. You might earn more dividends in the future if the company pays them.  

3. It can be a sign that the company is doing well and is confident about its future.  

Always keep in your Mind for Bonus shares:-  

1. They don't increase the value of your investment immediately.  

2. You might have to pay taxes when you sell these shares as per tax rules.  

3. It's not a guarantee of the company's future performance.  

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