Bonus shares are additional free shares issued to the shareholder by the company. Profitable Companies in India issue Bonus Shares. These are additional shares issues given the shareholder without any cost to existing shareholders. (Rights Issue of a share is not free)
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What does the Ratio of Bonus Shares mean?
Bonus shares in India are issued in a definite proportion to the existing holding. (Eg. Ratios against the number of shares holding by the shareholder)
Example 2 : 1 bonus would mean that you will get two additional shares (free) for every one share you hold in the company. If you hold 50 shares of a company, a Bonus share of 2:1 will get 100 Bonus shares FREE. So your total number of shares in that company will be 150 instead of 50, without any additional cost (is that exciting!!)
How Bonus Shares are Issued?
Bonus shares are issued by using on the free reserves of a company. Companies accumulate its reserves by retaining part of its profit over the years (the part that is not paid out as dividend). Sooner these free reserves increase. When the company issues Bonus shares, the reserves will converts into the capital.
Finally you are also not paying for this and the company’s profits are not affected.
Does it impact Stock Price?
Bonus Shares issue adds to the total number of shares in the market. If a company had 10 lakh shares. Now, with a bonus issue of 2:1, there will be 20 lakh shares issues. Now, there will be 30 lakh shares.
The earnings of the company will have to be divided by that new number of shares.
As the profits remain the same and the number of shares increases, the value of Earnings Per Share (EPS) will go down.
In fact, the stock price should also go down proportionately to the number of new shares. But sometimes, in reality, the share prices may not go down, which gives more advantage to the share holder.
Makes it Easy to Buy and Sell
Whenever Bonus shares are issued the stock becomes more liquid. And this make it easier to buy and sell.
Are Bonus Shares Good or Bad for me?
A bonus issue indicates that the company is booming and it is in a position to service its larger equity. Bonus share issue is considered as a positive sign for the company.
Whenever a bonus issue is announced, the company also announces a record date for the issue. Record date is the date on which the bonus shares takes effect, and shareholders are entitled to the bonus shares on that date.
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