A major question that comes to the mind of many new investors are “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 example. The name bonus has a notion that something is being given to us 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.
Let’s check, what is bonus share meaning. 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 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 companies profits have not changed, 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 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 bonus is declared and given no increase or decrease happens in total share price. Simple Ravi now has the double number of shares of half value.
Now, what is bonus share benefits for companies? The bonus issuing companies are considered to be good among investors. 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 the bonus. These companies want their investors to stay engaged and keep invested in them. Hence, the market price of these companies ultimately increases after the bonus is declared. On the other hand, the company also distributes their undistributed profits to the investors in the form of bonus issue.
What is bonus share difference with a stock split? The main difference between the two is in bonus issue the face value of the stock does not decrease, the company issues more shares of same face value, while in split the face value gets decreased. So, we have understood what is bonus share meaning with example. You can get bonus information off the Indian stock markets HERE. I will love to answer your queries on the subject on bonus and split in the comments section below.
Indrajit is a professional blogger and trading system developer. Amibroker expert, WordPress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.
Categories: Stock Market Basics