Bonus Shares

What Are Bonus Shares?

Bonus shares are additional shares that a company distributes to its existing shareholders for free. They are distributed in a predetermined proportion, such as 1:2 or 2:1. For example, in a 1:2 bonus, you receive one additional share for every two shares you hold. Firms release these shares from their retained profits or reserves rather than issuing cash dividends. The primary reason for the issue of bonus shares is to reward faithful shareholders and enhance the liquidity of the stock in the market.

bonus issue

Types of Bonus Shares

There are primarily two types of bonus shares.
Fully paid bonus shares
Fully paid bonus shares are distributed to shareholders without requiring any additional payment. They are the most prevalent and are credited directly to the Demat account.
Partly paid bonus shares
Partly paid bonus shares are those that were partly paid previously and are converted into fully paid shares at the time of the bonus issue. This is less frequent but exists in certain companies.

This classification helps the investor understand what he/she is getting and how it will impact their overall shareholding.

Key Factors to Consider When Analysing Bonus Shares

Prior to investing in stocks that are declaring future bonus shares, there are certain fundamental factors to be kept in mind.
  • OwnershipReason for Bonus Issue

    Firms issue a stock bonus to reward shareholders, enhance liquidity, or increase market capitalisation. Knowing the reason helps to estimate the company's motive.

  • OwnershipEffect on Earnings

    The issue of bonus shares raises the number of shares outstanding, which can reduce Earnings Per Share (EPS) even when the company's aggregate profits remain constant.

  • OwnershipOwnership Dilution

    Though the aggregate value of holdings does not change, ownership percentages and voting rights will marginally shift.

  • OwnershipMarket Sentiment

    Bonus share announcements usually generate enthusiasm, but prices of shares may go up or down depending on demand and prevailing market sentiments.

  • Company FundamentalsCompany Fundamentals

    Financial health, stable growth, and successful past records matter more than the bonus share.

Evaluating these aspects helps in making sound investment choices in bonus shares.

Steps to Invest in Bonus Shares

To leverage opportunities for stock bonuses, do the following:

  • Open and log in to your Demat account using Findoc. If you haven’t already, you can easily open demat account online to start investing.

    1

  • Locate the company that has declared future bonus shares.

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  • Put in a buy order for the required number of shares prior to the record date to be eligible for the bonus.

    3

  • Get your bonus shares. As soon as they are allotted, bonus shares will be credited automatically to your Demat account.

    4

  • Watch performance. Track the company's performance and the market value, then determine whether or not you wish to sell or retain the shares afterwards.

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By using these steps, it is possible to invest in bonus share allotments and enjoy stock bonuses while knowing what's happening with your investments.