For an investor, Bonus Share increases the number of shares and reduces the stock price – without changing the market value of a company. The Face Value of the share remains the same.
For example, in 2017 – India’s biggest company Reliance Industries issued 1:1 bonus. Every shareholder of the company received one bonus share for every share they were holding.
The number of shares of Reliance doubled, the stock price reduced by half and the Face Value remained unchanged at ₹ 10 per share.
Some examples of how Bonus shares are declared:
- 1:1 Bonus – For every 1 share held, one additional share will be given. If you have 100 shares, you’ll get 100 more shares. Total 200 shares.
- 1:2 Bonus – For every 2 shares held, one additional share will be given. If you have 100 shares, you will get 50 more shares. Total 150 shares.
- 2:5 Bonus – For every 5 shares held, two additional shares will be given. If you have 100 shares, you will get 40 more shares. Total 140 shares.
- 3:5 Bonus – Reliance gave 3:5 Bonus in the year 1983. That means for every 5 shares held, the shareholder got 3 extra shares. If you were holding 100 shares of Reliance in 1983 – you would’ve got 60 more shares taking the total to 160 shares.
Note: New Investors can stop reading here, as the next section of the article could be confusing and difficult to understand for those who have just started learning.
More detailed explanation of Bonus Shares
Bonus shares are funded through the Reserves of a company. It increases the share capital and decreases the stock price.
Since ‘Bonus Issue’ increases the number of shares of a company – the daily trading volume will increase. And because the price has become more affordable, more investors will participate in buying and selling – thereby creating more liquidity in the stock.
Along with the stock price – earnings per share (EPS), Book Value per share etc will also reduce due to increase in number of shares.