Imagine you sleep with 30 shares of Reliance in your account. The next day you have 60!
How?
Magic…. NOPE.
It’s the bonus issue.
Bonus shares are free additional shares that a company gives to existing shareholders in proportion to the number of the shares they already own.
Sounds like a bonus right?
But there is a catch!
A bonus share issue increases the number of shares you own but it does not increase your investment.
Let’s understand how it works.
How does the bonus share issue work?
A company announces a bonus issue of 1:1. It means for every 1 share of reliance you get 1 additional share.
Suppose you own 30 shares of Reliance. After the bonus issue you will get 30 more shares.
So now you have :
30 existing shares + 30 bonus shares = 60 shares
But now suppose the value of every share was 1000 per share. And in case of bonus the total investment does not change.
If you had 1 share trading at 1000. Now in the same amount you get 2 shares. So the price of the share adjusts to 500 each.
Before:
30 × ₹1,000 = ₹30,000
After:
60 × ₹500 = ₹30,000
You have more shares, but the bonus issue itself has not magically doubled your wealth.
What does the ratio of bonus share issue mean?
You must have heard announcements like 1:1,1:2 or 1:3 bonus issue.
They look confusing right?
They are simple once you get it.
- On the left side of the ratio is number of additional shares are going to issued per some given number of shares
- On the right side is the number of existing shares against which those additional shares are going to be issued.
For example for 1:3 ratio announcement,
1 additional share issued per 3 shares owned by the share holder.
Suppose you have 30 shares and there is an announcement of 1:3 bonus share issue.
It means that for every 3 shares you get 1 additional share.
So, for 30 shares you get 30/3 = 10 additional shares.
So, the goal shares now are : 30+10 = 40 shares.
This is the most confusing part every shareholder encounters whenever the bonus share issue is announced.
Why do companies issue bonus shares
Why Do Companies Issue Bonus Shares?
So, why would a company give additional shares to its existing shareholders?
There can be several reasons.
1. To reward existing shareholders:
It can be a way in which the company rewards its existing shareholders holding its shares.
Infosys has issued bonus shares many times through the years.
2. To capitalise its reserves:
Companies can use eligible reserves to increase their paid-up share capital through a bonus issue.
4. To make the share price more accessible:
After a bonus issue, the share price is adjusted. In a 1:2 ratio , for example it approximately halves. This can make the per-share price more accessible to investors and increase its liquidity in the market.
Conclusion
A bonus issue may give you more shares, but it does not mean the company has simply given you an equal amount of extra wealth.
So next time you see an announcement saying “1:1 bonus issue”, don’t get confused.
Just remember:
The left side = additional shares.
The right side = existing shares.
That’s it. Bonus shares aren’t magic. Once you understand the ratio, they become pretty simple.
There is another related concept- STOCK SPLIT – Understand here
Thanks for reading till the end – Isha Singla(About)
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