What is Bonus Share

Bonus share refers to giving of free stock or share to shareholders by the company. In simple words shareholders get additional shares for free. Bonus share are issued by company when it has huge cash reserves and it wants to reward its shareholders. Bonus shares are issued in proportion to existing holdings of the current shareholders of the company. So if a company announces bonus issue of 1:1, it implies that every shareholder who owns 1 share will get 1 share for free.

While the issue of bonus shares increases the total number of shares with the shareholders it does not increase the value of the investment of the shareholder. Since after bonus issue the share price gets reduced proportionally, in the above example if the share price was $100 then after bonus issue of 1:1 it will be $50.

When a bonus issue is announced, the company also announces a record date for the issue. The record date is the date on which the bonus takes effect, and the people who have shares on that date are entitled to the bonus. The share price of the stock gets adjusted after the record date.

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