A major question that comes to the mind of many new investors is – what is bonus share? Let us discuss the topic here and after reading this article you will be able to know bonus share meaning with an example.
Understanding Bonus Shares
The name bonus has a notion that investors are getting something extra. It denotes, we are getting something extra without paying anything extra. But in the stock market, a company issues a bonus as a gift to investors. They issue extra shares to investors based on their existing shares.
Bonus Share Example
Let’s check, what is the meaning of bonus share. Suppose Ravi has 100 shares of Associated Cement Company and the current market price is Rs. 1500. The company informs him that they will be giving him 1 share bonus on every 1 share that he has. That means they will be giving him a 1:1 bonus issue. But it does not change the financials of the company. The company simply adds the same number of shares in their books extra. But the company’s profits have not changed, and the balance sheet has not changed, in fact, nothing else is changed. So after the 1:1 bonus issue, the company’s share price becomes half at Rs. 1500 / 2 = Rs. 750.
So we understood bonus share meaning with an example of ACC. Ravi previously has 100 shares of Rs. 1500 each. His total share value was Rs. 1500 x 100 = Rs. 1,50,000. After issuing the bonus, Ravi now has 200 shares of Rs. 750 each. So now also his total share value is Rs. 750 x 200 = Rs. 1,50,000. That means that even after the company declares and issues the bonus, no increase or decrease happens in the total share price. Simple Ravi now has the double number of shares of half value.
Benefits of Bonus Shares for Companies
Now, what are bonus share benefits for companies? In general, investors consider bonus-issuing companies to be good for investment. Investors believe that these companies have good faith in their future growth prospects. These companies are earning good profits, hence, they are issuing more shares as a bonus. These companies want their investors to stay engaged and keep investing in them. Hence, the market price of these companies ultimately increases after the bonus is declared. On the other hand, the company also distributes its undistributed profits to investors in the form of bonus issues.
Bonus Share vs Stock Split
What is the bonus share difference with a stock split? The main difference between the two is in the bonus issue the face value of the stock does not decrease, the company issues more shares of the same face value, while in the split the face value gets decreased. So, we have understood what bonus share meaning with example. You can get bonus information from the Indian stock markets from this page. I will love to answer your queries on the subject of bonus and split in the comments section below.
FAQ on the Meaning of Bonus Share
Bonus shares are additional stocks or equity that a company distributes to the existing shareholders, free of cost. For instance, if ABC Limited gives 2 bonus shares for every 3 held by an investor – it means the shareholder will get 2 extra stocks with every block of 3 they already own.
A 1:2 Bonus Share is when a company offers its investors one extra stock/equity for every two they hold at no cost. This way each shareholder gets 50% more than what they currently own and increases their stake in the publicly-traded company without investing any money.
No, generally speaking, bonus shares do not have any effect on the market value or pricing of stock since there is no actual buying and selling taking place between buyers and sellers. Instead, companies just distribute new stocks directly to existing shareholders who simply benefit from an increase in their holdings without spending anything.
3:1 Bonus Shares refers to when companies offer three units of additional stocks/equity per single unit owned by individual investors at no charge whatsoever; i..e they receive 200% more than what they currently own! This helps secure ownership rights with minimal or zero financial investment towards increasing their stakes in the particular publically listed firm
In conclusion, a bonus share is a gift given to investors by a company based on their existing shares. Bonus shares do not change the financials of the company, and the total value of an investor’s shares remains the same even after a bonus issue. Companies issue them to show their faith in their future growth prospects and to distribute their undistributed profits to their investors. Finally, it is important to understand the difference between bonus shares and stock splits as they are two different ways in which a company can issue more shares.