Bonus Issue: Investors often hear about bonus issues in the stock market, but it can be confusing. How can a company give you more shares without changing the value of your investment?
What is a bonus issue?
A bonus issue, also called a scrip issue, is when a company issues free additional shares to its existing shareholders. Instead of paying cash dividends, the company rewards shareholders by giving more shares in proportion to their current holdings.
For example, in a 1:2 bonus issue, if you own 100 shares, you will receive 50 extra shares for free.
Why companies issue bonus shares?
- Companies usually announce bonus issues to:
- Reward Shareholders without spending cash.
- Make Shares More Affordable, as the price per share usually drops after the issue.
- Signal Confidence in their financial health and future growth.
What is Record date in Bonus Issue?
A record date is set to determine which shareholders are eligible for the bonus shares. To receive them, an investor must own the shares by the ex-bonus date, which is typically a few days before the record date.
How share counts increase without changing portfolio value?
Here's the key point: a bonus issue does not increase the total value of your investment immediately. It simply converts the company's reserves into share capital.
Before Bonus: You own 100 shares priced at Rs 100 each. Portfolio value = Rs 10,000.
After a 1:1 Bonus Issue: You now own 200 shares. The price adjusts to Rs 50 per share. Portfolio value = still Rs 10,000.
So, while the number of shares increases, the total value of your holdings remains the same immediately after the bonus issue. It's like getting extra pieces of the same pizza -- the total size doesn't change, just the number of slices.
Takeaway
A bonus issue is a way for companies to reward shareholders, increase liquidity, and signal strength, without changing the actual value of investors' portfolios. Over time, if the company grows, these extra shares can add real value, but on the ex-date, your portfolio value stays unchanged.