Bonus shares are a great way for companies to reward their shareholders. But what exactly are bonus shares, and how do they benefit you as a shareholder? In this blog, we will explain what bonus shares are, how they work, and what they mean for you. By the end, you will have a clear understanding of how bonus shares can impact your investment.
What Are Bonus Shares?
Bonus shares are extra shares given to existing shareholders by a company at no cost. They are issued based on the number of shares a shareholder already owns. For example, if a company announces a 1:1 bonus, it means for every share you already own, you will receive one more share for free.
Bonus shares are often issued when a company wants to share its profits with shareholders but doesn’t want to pay cash. Instead, it gives out more shares.
How Do Bonus Shares Differ from Dividends?
Bonus shares and dividends are both ways companies share their profits with shareholders. Here's the difference:
Why Do Companies Issue Bonus Shares?
Companies issue bonus shares for a few reasons:
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To Reward Shareholders: Giving bonus shares is a way to thank shareholders for their support.
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To Increase Liquidity: Bonus shares increase the total number of shares available, which makes it easier to buy and sell shares.
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To Boost Investor Confidence: By issuing bonus shares, companies can show they are financially healthy and able to share profits with their investors.
How Do Bonus Shares Benefit Shareholders?
Here’s how bonus shares can benefit shareholders:
For example, if you own 100 shares and the company issues a 1:1 bonus, you will now own 200 shares.
Example of Bonus Shares
Let’s take a simple example of how bonus shares work:
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Before Bonus: You have 100 shares, each worth ₹100.
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After Bonus: The company gives you 100 more shares for free (1:1 bonus). Now you have 200 shares, but each share may drop to ₹50 to reflect the increased number of shares.
So, before the bonus:
100 shares * ₹100 = ₹10,000
After the bonus:
200 shares * ₹50 = ₹10,000
Even though the share price is lower, your total investment value remains the same.
Criteria for Bonus Share Eligibility
To be eligible for bonus shares, you need to meet a few criteria:
What Happens to the Share Price After Bonus Shares Are Issued?
When bonus shares are issued, the stock price usually drops. This happens because the company’s value is now divided among more shares. However, your total investment remains the same initially.
This drop in share price is normal and doesn’t affect the value of your investment in the short term.
Downside of Bonus Shares
While bonus shares are usually good, there are a few downsides:
Bonus shares are a great way for companies to reward their shareholders without paying cash. They allow you to own more shares, which could lead to higher returns over time. However, there are some downsides to consider, such as the impact on share value and tax on the sale of shares. Before investing, it's important to understand how bonus shares work and how they can affect your investments in the long term.
Key Differences Between Bonus Shares, Cash Dividends, and Stock Splits
Key Differences:
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Bonus Shares and Stock Dividends are ways companies issue additional shares, but bonus shares are given for free, whereas stock dividends are usually given as a percentage of what you already own.
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Right Shares allow you to purchase additional shares at a discounted price, while Cash Dividends provide immediate cash payouts from the company’s profits.
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Stock Splits don’t give you extra value, but they simply divide your shares into more, lowering the price per share to make it more affordable.
How Bonus Shares Affect the Share Price
When a company issues bonus shares, the share price usually goes down to adjust for the increased number of shares in the market. Here’s how it works:
For example, let’s say you own 100 shares priced at ₹100 each. If the company announces a 1:1 bonus, you will receive 100 more shares, so your total shares will now be 200. But, the price per share will likely drop to ₹50 to keep the total value of your investment the same.
This happens because the company’s total value is now divided into more shares, which causes the share price to adjust.