Bonus Shares – Meaning, Types & Advantages of Bonus Shares

If you’ve ever held shares of a company and received extra shares without paying anything, you’ve likely been gifted what’s called a bonus share. It feels great, right? But what exactly are bonus shares, why do companies issue them, and do they offer any real benefit?

Let’s break it down in a simple terms so even beginners can understand this concept clearly.

What Are Bonus Shares?

Bonus shares are free additional shares given by a company to its existing shareholders. Think of it as a company’s way of rewarding its investors — not through cash dividends, but by increasing their shareholding.

But here's the catch: You’re not getting anything extra in terms of value — just more shares. The total value of your investment usually remains the same immediately after the bonus issue. What changes is the number of shares you hold and the price per share.

Example:

Let’s say you own 100 shares of a company that trades at ₹200 per share. If the company announces a 1:1 bonus, you’ll receive 100 additional shares for free, but the price per share will adjust to around ₹100. The total value (₹20,000) stays unchanged — at least initially.

🧾 Why Do Companies Issue Bonus Shares?

You might be wondering — if it doesn’t add to your immediate wealth, why bother?

Well, companies issue bonus shares for a few strategic reasons:

1. Reward Loyal Shareholders
   It’s a goodwill gesture that keeps investors happy and engaged.
2. Improve Liquidity
   When the number of shares increases, and the stock price decreases proportionally, it becomes more affordable. This often attracts more retail investors and boosts trading volume.
3. Signal of Financial Strength
   Companies typically issue bonus shares when they have strong reserves. It signals that the company is doing well and confident about future growth.
4. Adjust Market Price
   If a stock becomes too expensive, bonus shares bring the price down to a more attractive range without affecting market capitalization.

Types of Bonus Shares :-

While bonus shares generally follow a similar process, they can be issued in different proportions depending on the company's reserve strength and intention.

✅ 1. Fully Paid Bonus Shares

These are the most common type. They are issued by the company without any cost to shareholders, using its free reserves or share premium account.

✅ 2. Partly Paid Bonus Shares

These are less common and refer to shares where the shareholder must pay the remaining balance in future installments. Indian companies usually avoid this method due to regulatory restrictions.

📚 How Are Bonus Shares Issued?

Here’s a brief overview of the process:

1. The Board of Directors proposes a bonus issue.
2. It’s then approved by shareholders in a general meeting.
3. A record date is announced — only shareholders on record by this date are eligible to receive the bonus.
4. Shares are credited directly to the demat account of eligible shareholders.

No need to apply. No paperwork. No charges.

💰 Advantages of Bonus Shares for Shareholders

Although they don’t immediately increase your bank balance, bonus shares can be highly beneficial in the long run.

🔹 1. Improved Liquidity

Lower stock price after a bonus issue makes it easier for new investors to enter the stock. This often increases buying and selling activity.

🔹 2. Long-Term Wealth Creation

While your share price may fall post-bonus, if the company grows over time, the multiplied number of shares can result in higher absolute gains.

🔹 3. No Tax at the Time of Issue

Bonus shares are not taxed at the time of issue in India. However, if you sell them later, capital gains tax applies based on the acquisition date and holding period.

🔹 4. Psychological Benefit

More shares = more ownership. Even though the real value doesn’t change, it feels rewarding. Many investors view it as a positive sign from the company.

📉 Are There Any Disadvantages?

While bonus shares are mostly positive, there are a few things to keep in mind:

• No Actual Increase in Value (Initially)
  Bonus shares don’t make you instantly richer. It’s more of a rebalancing act.
• Share Dilution
  The overall value per share drops, which can confuse new investors or create a perception of loss.
• Misuse by Weak Companies
  Some companies use bonus issues just to prop up share prices or manipulate market interest — especially without sound financials. Be cautious.

Bonus Shares vs Stock Split:

Factor	Bonus Shares	Stock Split
What changes?	Number of shares issued	Face value of existing shares
Impact on capital?	Reserves reduce	No change in reserves
Shareholder impact	Gets additional shares	Existing shares are split
Reason	Reward shareholders	Increase liquidity

Both make stocks more affordable, but the logic behind each is different.

✅ Conclusion

Bonus shares might not sound exciting at first glance, but over time, they can enhance your portfolio’s strength and flexibility. If you're investing for the long haul, a well-timed bonus issue from a fundamentally strong company can lead to significant wealth creation.

So the next time you hear about a company issuing bonus shares, don’t just think of it as a freebie. It’s often a vote of confidence from the company in its future — and yours as a shareholder.

 

✅ FAQs

1. What are bonus shares in the stock market?

Bonus shares are free additional shares issued by a company to its existing shareholders, typically in a specific ratio like 1:1 or 2:1, using its accumulated reserves.

2. Are bonus shares free for shareholders?

Yes, bonus shares are issued without any cost to shareholders. You don’t need to pay anything or fill any form—they're directly credited to your demat account.

3. Do bonus shares increase the value of my investment?

While the number of shares increases, the overall value usually remains the same immediately. However, over time, as the company grows, your total investment value may increase.

4. What is the record date in bonus shares?

The record date is the cut-off date announced by a company. Only shareholders who own the stock on or before this date are eligible to receive the bonus shares.

5. How are bonus shares different from stock splits?

Bonus shares are issued from the company’s reserves, adding new shares. A stock split divides existing shares into smaller units without impacting the total share capital or using reserves.