What is a Bonus Share? A Quick Guide
20 September, 2024
Synopsis
Bonus shares are extra shares issued to existing shareholders at no cost.
The issuance of bonus shares can dilute per share ratios like Earnings Per Share (EPS) and Book Value per Share.
With the bonus issue, the share price may decrease in proportion to the bonus shares issued, and the total investment value remains unchanged.
Staying informed about various investment options is crucial for optimising your financial portfolio. As investors, we always seek ways to enhance returns and manage holdings effectively. When investing in equities, you should also be aware of the issuance of bonus shares.
Bonus shares are a strategic tool companies use to reward existing shareholders and signal confidence in future growth. Bonus shares also increase your shareholdings without requiring additional investment. Let us learn what is the bonus issue of shares and how it works to help you make better-informed decisions.
What is a Bonus Share?
Bonus shares are extra shares issued to existing shareholders of a company. These shares are issued at no cost and are based on the number of shares stockholders already own on a particular record date which is announced by the company. Bonus shares are a way for companies to reward their shareholders by increasing their stockholdings. These shares are distributed in proportion to the number of shares each investor already owns on the record date. For example, issuing one new share for every two shares held.
While bonus shares do not alter the overall value of an investor’s holdings, they increase the number of shares in circulation. This potentially enhances liquidity and reflects the company’s confidence in its future growth.
Let us assume you own 100 shares of a company, XYZ Ltd. The company announces a 3:1 bonus issue. This means you will receive 3 additional shares for every 1 share you currently hold.
Before Bonus Issue:
>Number of Shares: 100
>Share Price: ₹50
>Total Investment Value: 100 shares × ₹50 = ₹5,000Bonus Shares Issued:
>Bonus Shares: 3 × 100 = 300 shares
>Total Shares After Bonus Issue: 100 original shares + 300 bonus shares = 400 sharesNew Share Price (Approximate):
>Since the number of shares has increased, the share price might adjust to ₹50 / 4 (because 4 times the original shares) = ₹12.50After Bonus Issue:
>Number of Shares: 400
>New Share Price: ₹12.50
>Total Investment Value: 400 shares × ₹12.50 = ₹5,000
Even though the share price has dropped, the total value of your investment remains the same at ₹5,000. It will only reflect the increased number of shares.
Advantages of Bonus Shares for Shareholders
Following are the benefits of bonus shares that you can get as a shareholder:
Increased Shareholding: You receive additional shares at no extra cost. This increases the total number of shares. This can lead to a larger stake in the company and the potential for greater returns if the company's value is appreciated.
Enhanced Liquidity: With more shares in circulation, trading becomes more liquid which makes it easier to buy or sell shares. This can be beneficial if you are looking to trade holdings.
No Immediate Tax Implications: Receiving bonus shares does not incur immediate tax liabilities. You only pay taxes on these shares when you sell them and realise a capital gain.
Perception of Company Health: The issuance of bonus shares often reflects a company’s positive performance and confidence in its prospects. This helps boost investors’ confidence and potentially enhance market perception.
Manage Your Portfolio with HDFC Bank Demat Account
To manage and optimise your portfolio effectively, consider using an HDFC Bank Demat Account. With our Demat Account, you get the ability to invest in a wide range of securities, including equities, derivatives, ETFs and Mutual Funds. This allows you to diversify and enhance your portfolio. Furthermore, you can seamlessly link your HDFC Bank Savings Account to your Demat and Trading Accounts. This allows for hassle-free fund transfers and instant redemptions.
*Disclaimer: Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.
