Investment word of the day: Bonus shares — what are they and how do they differ from stock split?

Investment word of the day: Several companies announce various corporate actions, keeping in mind the financial health, interests of shareholders or to improve profitability. One such corporate action is the issue of bonus shares.

What are bonus shares?

The issue of bonus shares is a corporate action where additional shares are given to existing shareholders. A company may decide to distribute additional shares as an alternative to dividends. The number of shares increases in the case of a bonus issue, but the total value of the investment stays the same. The price of the share is adjusted in accordance with the bonus issue; hence, the value of the holding remains the same.

Bonus share — an example

If a shareholder holds 100 company shares with a face value of ₹10 each, and the company declares a 2:1 bonus issue, the shareholder will receive two shares for each share held. Hence, the shareholder will get an additional 200 shares for 100 shares held, giving the shareholder 300 shares. It must be noted that the investment value remains the same after bonus shares are issued.

Types of bonus shares

Fully paid bonus shares

Fully paid bonus shares are allotted to shareholders without any extra cost. These shares are issued to the existing shareholders in proportion to their current holdings. These shares are typically issued without any additional costs to the shareholders.

Partially paid bonus shares

Partially paid bonus shares are issued to shareholders who did not pay the full amount of the shares at the time of issuance. The shareholder does not fully own these shares until the outstanding balance is paid.

Why do companies offer bonus shares?

Companies generally offer bonus shares to encourage retail investor participation and reward existing shareholders. It acts as an alternative to dividends and aims to boost confidence of investors.

How are bonus shares different from a stock split?

Bonus shares and stock splits are corporate actions that increase the number of shares. However, bonus shares are additional shares issued to shareholders, while a stock split divides existing shares.

Disclaimer: This article is for informational purposes only and does not constitute financial advice; please consult a qualified financial advisor before making any financial decisions.