Bonus Shares
If you want to know more about Bonus shares please read this first.
Are Bonus Shares Good or Bad?
The quick answer to this question is : It is neither Good nor Bad in the fortunes of the company or for the share holders.
Usually everyone likes to have bonus (salary). But having a bonus share is not that happy as getting a bonus together with their salary. By issuing bonus shares, the company rewards its shareholders without any change in their cash balance. A company can make an investor happy by issuing a Dividend or Bonus shares.
Impact on stock price after declaring the issue of bonus?
After detailed analysis of data for few years it is found that there may be slight surge on the price just before declaring the issue, only for certain stocks. It may have happened due to insider information. But usually after the declaration there will not be much change in the stock price, since there is no impact on the cash balances. It is not same for all companies, some companies share prices may shoot after hearing the news of bonus shares but the peak price may not sustain for long.
Why the stock prices are not affected?
Whenever a bonus is issued it will add to the total number of shares in the market.
For example, if a company is having 100 thousand shares. A bonus issue of 1:1will add 100 thousand shares. The total shares available in the market will be 100 thousand (previous) + 100 thousand (bonus) = 200 thousand.
The earnings of the company needs to be shared with 200 thousand shares instead of 100 thousand shares. It leads to drop in Earnings per share.
Earnings Per Share = Net Profit/ Number of Shares
The profit will never change only the quantity of shares increased in double. So the earnings per share (EPS) should drop.
As per the above method the value of market price of the share shall drop in proportion to the bonus issue ratio (1:1 or 1:2 etc). But it may not happen because now the stock has become more liquid which makes it more easier to buy and sell.