Bonus Shares: Simple Guide for Investors

Ever wondered why a company might give you extra stock for free? That’s a bonus share. It’s not a giveaway for the sake of it – it’s a tool that companies use to reward shareholders and tidy up their balance sheets. In plain terms, a bonus share is a free additional share that you receive in proportion to the shares you already own.

Let’s say you hold 100 shares of a firm that announces a 1:5 bonus issue. You’ll end up with 20 extra shares (one for every five you own) without paying a single rupee. Your total number of shares goes up, but the overall value of your holding stays roughly the same because the market adjusts the price.

How Bonus Shares Work

Companies issue bonus shares from their accumulated profits or reserves. Instead of paying cash dividends, they convert a part of those reserves into new shares. The key steps are:

• Board approval: The board decides how many bonus shares to issue and the ratio.
• Shareholder meeting: Shareholders vote to confirm the plan.
• Record date: If you own shares on this date, you qualify for the bonus.
• Allotment: New shares are credited to your demat account.

Because the company’s total share count rises, the market price per share usually drops proportionally. For example, a share priced at ₹500 before a 1:2 bonus (one extra share for every two you own) might open at around ₹333 after the issue. Your total investment value doesn’t change dramatically; you just hold more pieces of the same pie.

Things to Watch Before Buying

Bonus shares sound great, but there are a few practical points to consider:

• Liquidity: More shares in the market can boost trading volume, making it easier to buy or sell.
• Tax impact:
  • In many jurisdictions, receiving bonus shares is not a taxable event. However, when you later sell them, the cost basis is spread across the original and bonus shares, affecting capital gains calculations.
• Company health: A bonus issue often signals that the firm has retained earnings and confidence in its future. But it could also be a way to make its stock look more affordable by lowering the price per share.
• Market perception: Some investors view bonus shares as a positive sign, while others think it may dilute earnings per share if not backed by genuine growth.