If you’ve ever wondered what are bonus shares and why companies issue them, you’re in the right place. Bonus issues are a common corporate action in the Indian stock market, yet many investors don’t fully understand how they work. In this blog, we simplify the concept, the process, and how bonus shares can impact your portfolio. Whether you manage your own investments or rely on a share market advisor, knowing how bonus issues function can help you make smarter decisions.
What Are Bonus Shares?
Bonus shares are additional shares given by a company to its existing shareholders for free. These shares are issued from the company’s accumulated profits or reserves. Instead of distributing cash, the company rewards investors by increasing the number of shares they hold. That’s why investors often ask, “what are bonus shares and how do they benefit me?” The answer is simple: they increase your total shareholding without requiring you to invest anything extra.
Why Do Companies Issue Bonus Shares?
Companies announce bonus issues for several reasons. A bonus issue helps improve liquidity in the market by increasing the number of outstanding shares. It also signals confidence in the company’s future growth. Companies with strong reserves prefer issuing bonus shares instead of paying dividends when they want to retain cash for expansion. From an investor’s perspective, bonus shares make the stock more affordable, attracting more buyers and improving overall market participation.
How Do Bonus Shares Work?
Bonus shares are issued in a specific ratio. For example, a 1:1 bonus issue means you get one additional share for every share you already own. A 2:1 bonus issue means you get two free shares for every one share held. After the bonus issue, the share price adjusts accordingly. Although the price per share drops, your total investment value remains broadly the same. Over time, if the company continues to perform well, the expanded shareholding may create long-term wealth for investors.
Example of a Bonus Issue
Imagine you own 100 shares of a company trading at ₹1,000 each. The company announces a 1:1 bonus issue. You now receive 100 additional shares at no cost, bringing your total to 200 shares. After the bonus, the market price typically adjusts to around ₹500. The overall value remains unchanged initially, but the higher number of shares can generate more gains if the company grows.
Who Is Eligible for Bonus Shares?
Only shareholders who hold the stock before the record date announced by the company are eligible. If you buy the stock on or after the ex-bonus date, you won’t receive bonus shares. This is why investors monitor corporate action announcements closely, often with the help of a share market advisor or an investment advisory service.
Do Bonus Shares Create Wealth?
In the short term, bonus shares do not directly increase your wealth since the share price adjusts downward. However, in the long run, bonus issues can be beneficial if the company continues to grow. Bonus shares also have psychological benefits — a lower price post-bonus attracts more retail participation and improves liquidity, which can contribute to price appreciation over time.
Taxation on Bonus Shares
Bonus shares are not taxed at the time of issuance. However, when you sell them, capital gains tax applies. The cost of acquisition for bonus shares is considered zero, which means your entire selling price is considered a capital gain. Investors should plan taxes strategically, especially if they use annual bonus income to invest, and consider calculating future gains using tools like a budget buddy calculator.
Should You Buy a Stock Just for Bonus Shares?
Many retail investors get attracted to bonus announcements. But buying a stock solely for the bonus issue is not advisable. Bonuses do not change company fundamentals. Before investing, it’s better to analyse financial performance, long-term growth potential, management quality, and valuation. If needed, take guidance from a share market advisor or a registered investment advisor who can help evaluate whether the stock fits your overall investment strategy.
Benefits of Bonus Shares
• Increases liquidity in the market
• Signals strong financial health
• Makes high-priced shares affordable
• Encourages long-term investing
• Rewards shareholders without affecting cash flow
• Enhances investor confidence in the company
Are Bonus Shares Better Than Dividends?
Bonus shares and dividends serve different purposes. Dividends offer immediate income, while bonus shares are a long-term wealth-building tool. Investors who prefer compounding generally benefit more from bonus issues. Those who rely on regular income may prefer dividends. A balanced portfolio often includes companies offering both.
Final Thoughts
Understanding what are bonus shares and how bonus issues work is essential for every investor. While the immediate monetary impact of bonus shares may be neutral, the long-term value can be substantial if the company continues its growth trajectory. So before reacting to any bonus announcement, assess the company’s fundamentals, long-term potential, and your investment goals.
If you want personalised guidance, a share market advisor can help you make more informed decisions and align your investments with your financial goals. Bonus shares can be powerful wealth creators—but only when combined with disciplined investing and smart analysis.
Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.
FAQs on Bonus Issue of Shares
1. What are bonus shares in simple words?
Bonus shares are free shares a company gives to existing shareholders by converting its profits or reserves into equity.
2. Why do companies issue bonus shares?
Companies issue bonus shares to reward shareholders, improve liquidity, and make their stock more affordable without affecting cash reserves.
3. How do bonus issues work?
In a bonus issue, investors receive extra shares in a specific ratio such as 1:1 or 2:1. For every share you hold, you get additional free shares.
4. Do bonus shares increase my wealth?
Immediately, no. The share price adjusts after the bonus. However, long-term gains may increase if the company grows consistently.
5. Who is eligible to receive bonus shares?
Shareholders who own the stock before the announced record date are eligible.
6. What is the ex-bonus date?
The ex-bonus date is the cutoff date after which new buyers are not entitled to bonus shares.
7. Can I buy a stock just before the record date to get bonus shares?
Yes, but it’s not always advisable. Always check fundamentals or consult a share market advisor before buying.
8. Are bonus shares taxable?
Bonus shares are not taxed when issued, but capital gains tax applies when you sell them.
9. What happens to share price after a bonus issue?
The share price adjusts proportionately. For example, after a 1:1 bonus, the price typically halves.
10. Is a bonus issue the same as a stock split?
No. A stock split divides each share into multiple shares. A bonus issue gives additional free shares from reserves.
11. Do bonus shares affect dividends?
If dividends are given on a per-share basis, the total dividend payout for shareholders may increase after bonus shares are issued.
12. Are bonus issues good for long-term investors?
Yes, if the company has strong fundamentals. Bonus shares help increase overall shareholding, which can compound wealth over time.
13. How can I calculate the impact of a bonus issue on my portfolio?
You can use tools like a Budget Buddy Calculator to estimate changes in holdings, valuation, and future returns.
14. What is meant by a 1:1 or 2:1 bonus share ratio?
A 1:1 ratio means one free share for every share held. A 2:1 ratio means two free shares for each share owned.
15. Do all companies issue bonus shares?
No. Bonus issues are offered only by companies with strong reserves and consistent profitability.
16. Can I sell bonus shares immediately after receiving them?
Yes, once the shares are credited to your demat account, you can sell them. But long-term holding may offer better gains.
17. What documents are needed to receive bonus shares?
No documents are required. Bonus shares are automatically credited to your demat account if you are eligible.
18. Are bonus shares beneficial for small investors?
Yes. They allow small investors to increase their holdings without additional investment and make high-priced stocks more accessible.
19. Should I invest my annual bonus in companies issuing bonus shares?
If the company has strong fundamentals, using your annual bonus to invest may help build long-term wealth. However, evaluate risk or consult a share market advisor.
20. How do bonus shares affect company valuation?
Bonus issues don’t change the company’s market capitalization; they only increase the number of shares in circulation, adjusting the price accordingly.
