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Bonus

Published: Friday, 16 October 2020

A Bonus issue is a stock dividend. A company allots these shares for rewarding its shareholders. Issued out of the company’s reserves,bonus shares are free and the shareholders receive them against the shares currently held.Allotments are typically made in a fixed ratio e.g. 1:1, 2:1, 3:1 etc.

 

A 2:1 bonus ratio means the existing shareholders (as on the record date) will get 2 additional shares for every 1 share held at zero cost. A shareholder holding 100 shares will get additional 200 shares free, taking his total number of shares held to 300.

 

On bonus issue, the number of shares held will increase but the overall value of investment will remain the same. Hence price per share reduces.

 

Let’s take an illustration:

 

Bonus Issue

No of shares held before bonus

Share price before Bonus issue

Value of Investment

Number of shares held after Bonus

Share price after Bonus issue

Value of Investment

1:1

200

50

10,000

400

25.0

10,000

2:1

20

200

4,000

60

66.7

4,000

4:1

1000

20

20,000

5,000

4.0

20,000

 

Companies generally give away bonus shares to boost participation of retail investors, particularly when a company’s share price has risen quite high making entry of new investors difficult. Bonus issue reduces share price by increasing the number of outstanding shares keeping the aggregate value same, thus making it affordable.


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