Investing in the stock market can be both exciting and rewarding, but it also comes with its own set of terms and concepts that might seem complex at first. One such concept is “bonus shares.” In this blog post, we’ll break down everything you need to know about bonus shares in simple, easy-to-understand terms.
What is a Bonus Share?
A bonus share is an additional share given to existing shareholders by a company, free of cost. These shares are issued out of the company’s accumulated profits or reserves. In simple words, if you own shares in a company and it announces a bonus issue, you’ll receive extra shares without paying anything for them.
How are Bonus Shares Provided?
Bonus shares are provided to shareholders in a specific ratio, such as 1:1, 2:3, or 5:1. This ratio indicates how many additional shares a shareholder will receive for the number of shares they currently own. For example, if a company announces a 1:1 bonus share, it means you will receive one additional share for every share you already own.
What is the Eligibility Criteria for Bonus Shares?
To be eligible for bonus shares, you need to be a shareholder of the company on a specific date, known as the “Record Date.” The company sets this date to determine who is eligible to receive the bonus shares. If you hold the shares on the record date, you are eligible to receive the bonus shares.
Record Date and Ex-Date
- Record Date: This is the cut-off date set by the company. Only shareholders who own shares on this date are eligible to receive the bonus shares.
- Ex-Date: This is the date on which the shares start trading without the bonus entitlement. To be eligible for the bonus, you must purchase the shares before the ex-date.
For instance, if the record date is August 10th and the ex-date is August 9th, you need to buy the shares on or before August 8th to be eligible for the bonus shares.
Why Do Companies Issue Bonus Shares?
Companies issue bonus shares as a way to reward their existing shareholders and to increase the liquidity of their shares. It’s a signal that the company is doing well financially and has accumulated profits that it wants to share with its investors. Issuing bonus shares also makes the stock more affordable for new investors since the price per share usually decreases after the bonus issue.
What is a 1:1 Bonus Share?
A 1:1 bonus share means that for every share you own, the company gives you one additional share for free. This is one of the most common types of bonus issues.
Example of a 1:1 Bonus Share
Let’s say you own 100 shares of a company, and each share is worth ₹1,000. Your total investment would be:
100 shares × ₹1,000 per share = ₹1,00,000
Now, if the company announces a 1:1 bonus share, you will receive 100 additional shares, so you now have 200 shares in total. However, the price per share will likely decrease to ₹500, keeping the total value of your investment the same:
200 shares × ₹500 per share = ₹1,00,000
As you can see, while you now have more shares, the overall value of your investment remains unchanged.
Understanding Different Bonus Share Ratios :
Bonus shares come in different ratios, and understanding how each works can help you better navigate your investments. Let’s look at some examples like 2:3, 4:10, and 5:1 in simple terms.
1. 2:3 Bonus Share
What It Means: For every 3 shares you own, the company gives you 2 additional shares.
Example in Indian Rupees:
- Before Bonus: You own 30 shares, each worth ₹1,000. Your total investment is:
- 30 shares × ₹1,000 per share = ₹30,000
- After Bonus: You get 20 additional shares (since 2 shares are given for every 3 shares you own), so you now have 50 shares. The share price will adjust accordingly, likely decreasing:
- New share price = ₹600
- 50 shares × ₹600 per share = ₹30,000
Your investment value remains ₹30,000, but you now have more shares.
2. 4:10 Bonus Share
What It Means: For every 10 shares you own, the company gives you 4 additional shares.
Example in Indian Rupees:
- Before Bonus: You own 100 shares, each worth ₹500. Your total investment is:
- 100 shares × ₹500 per share = ₹50,000
- After Bonus: You get 40 additional shares, so you now have 140 shares. The price per share decreases:
- New share price = ₹357
- 140 shares × ₹357 per share = ₹49,980 (approximately ₹50,000)
Your investment value stays around ₹50,000, but you gain more shares.
3. 5:1 Bonus Share
What It Means: For every share you own, the company gives you 5 additional shares. This is a more generous ratio.
Example in Indian Rupees:
- Before Bonus: You own 10 shares, each worth ₹2,000. Your total investment is:
- 10 shares × ₹2,000 per share = ₹20,000
- After Bonus: You get 50 additional shares, so you now have 60 shares. The price per share decreases significantly:
- New share price = ₹333
- 60 shares × ₹333 per share = ₹19,980 (approximately ₹20,000)
Even though the number of shares increases substantially, your investment value remains around ₹20,000.
Different bonus share ratios like 2:3, 4:10, and 5:1 affect the number of shares you own and their price. However, the overall value of your investment stays the same. Understanding these ratios can help you better manage your portfolio and make informed decisions about your investments.
How Does It Affect You?
- More Shares: You get more shares in your account, which can be beneficial in the long run if the company continues to grow.
- Lower Share Price: The price per share decreases proportionally, so the total value of your investment stays the same.
- No Immediate Financial Gain: Although you receive additional shares, your wealth doesn’t increase immediately because the market adjusts the share price to reflect the bonus issue.
- Potential for Future Growth: Holding more shares could be beneficial if the company performs well in the future, as you now have more shares to profit from.
Conclusion
Bonus shares are a way for companies to reward their shareholders without directly paying out cash. While they increase the number of shares you hold, they don’t immediately increase the value of your investment. However, if the company continues to grow, those extra shares could lead to greater returns in the long run.
Understanding how bonus shares work and what they mean for your investment is essential for making informed decisions in the stock market. Whether it’s a 1:1 bonus or any other ratio, knowing the basics can help you navigate these opportunities with confidence.
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