About Bonus Shares
Bonus shares are additional free shares issued to an existing shareholder by the company in a defined proportion to the existing holding.
Bonus shares are free shares issued by the company to its existing share holders. Bonus shares are issued in a ratio of the shares an investor hold. For example when a company offers 1:5 bonus shares, it means a share holder will get 1 free share for 5 shares. So if an investor holds 100 shares at the time of bonus then they will become 120 shares.
Bonus shares are usually announced by the company with a record date, the date which is considered for the bonus shares. All the investors holding the shares on the record date are eligible for bonus shares.
Company usually gives bonus shares as a substitute of dividend payouts.
The face value of the share doesn’t get change after bonus. This is unlike stock split.
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Bonus shares increases the number of shares in the market which changes the Earning Per Share EPS (companies net profit/number of shares). As net profit is still remain same and the numbers of shares are higher, shares EPS goes down after the bonus shares are issued.
Ideally it should reduce the share price but it doesn’t happen in the ratio of shares are offered as bonus shares thus it usually in the profit of the share holders. This happens because of increase in liquidity of the share and signal of company’s promise to share its profit with its investors.
Two important terms used are Ex-date and Record date while issuing Dividends and Bonus and following is the explanation for same
Who hold the stock before ex-date will be eligible for bonus issue. Record date is usually Ex-date+1 or 2 days. The bonus shares will reflect in your account on Record date.