Bonus shares
Bonus shares are extra shares that a company gives to its existing shareholders at no charge, in a fixed ratio such as 1 for 1. The shares come from the company's own reserves, so no cash changes hands. Your holding has more shares, but each share is worth proportionately less.
How a bonus issue works
The company announces a ratio and a record date. A 1 for 1 bonus means one new share for every share you hold, so a holding of 100 becomes 200. You must own the shares by the cut-off date set for the bonus to receive it.
The company turns part of its accumulated profits, held as reserves, into share capital. That is why it can hand out shares without receiving any payment.
Why the price falls
The company is the same size as before, but it now has more shares. So the price per share adjusts down. The value of your total holding and the company's market cap are unchanged at that moment. A bonus is not extra profit and not a return.
Bonus and split
A stock split divides each share into smaller ones and a bonus issue gives extra shares from reserves. Both raise the number of shares and lower the price per share. They differ in how they are done, not in what they do to the value of your holding.
Bonus and dividend
A dividend pays out cash that leaves the company. A bonus pays out no cash. Companies sometimes announce both, but they are separate decisions.
A 1 for 1 bonus (hypothetical numbers)
Suppose you hold 100 shares priced at ₹600, a holding worth ₹60,000. The company announces a 1 for 1 bonus. You now hold 200 shares, and each is priced near ₹300, so the holding is still worth about ₹60,000. You have more shares and no more value.
Common questions
- What are bonus shares in simple words?
- Extra shares a company gives its shareholders for free, in a fixed ratio.
- Do bonus shares increase my wealth?
- Not at that moment. You own more shares, but each is worth proportionately less, so the total value of your holding is unchanged.
- What is the difference between a bonus issue and a dividend?
- A bonus gives extra shares and no cash. A dividend pays out cash from the company's profit.
- What does 1 for 1 mean?
- One new share for every share you already hold.