{"id":3094,"date":"2025-03-03T19:41:41","date_gmt":"2025-03-03T14:11:41","guid":{"rendered":"https:\/\/www.torusdigital.com\/toruscope\/?p=3094"},"modified":"2025-06-30T18:07:22","modified_gmt":"2025-06-30T12:37:22","slug":"what-is-bonus-shares","status":"publish","type":"post","link":"https:\/\/www.torusdigital.com\/toruscope\/stocks\/what-is-bonus-shares\/","title":{"rendered":"What Is Bonus Shares? Meaning, Benefits, and Types Explained"},"content":{"rendered":"

[vc_section el_id=”blog-inner-layout”][vc_row overlay_dotted=””][vc_column el_class=”blog_primary”][vc_row_inner][vc_column_inner][vc_column_text css=””]For many investors, receiving free shares in a company they have invested in is quite an attractive value proposition. It is one of the reasons why stock bonuses appear to be an exciting option among investors in the stock market.<\/p>\n

However, you must understand the intricacies of bonus shares before you add them to your investment portfolio. In this guide, we will discuss everything about bonus shares, including what is a bonus share<\/strong>, its purpose, types, impact on the market, and more.<\/p>\n

<\/span>What is Bonus Shares?<\/span><\/h2>\n

Bonus shares are extra shares issued by a company to its existing shareholders, free of cost. As a shareholder, you can sell these stocks in the secondary market<\/a><\/strong> to fulfil your liquidity requirement. In addition, the companies can issue bonus shares even when they do not require cash and cash equivalents.<\/p>\n

<\/span>What is the Purpose of Bonus Shares?<\/span><\/h2>\n

After understanding the meaning of bonus shares<\/strong>, you must learn about their purpose. There are certain occasions when a company cannot pay dividends in cash, owing to possible cashflow storage, though the company has gained good turnover. In such situations, the company may offer bonus shares to the existing shareholders instead of dividend payments.<\/p>\n

Bonus shares are issued from fresh or additional shares, free of cost and proportionate to the shareholder’s stake. Anytime the company issues bonus shares, there is a profit ‘capitalisation’, which involves the transfer of profits of a firm or its reserves to share capital.<\/p>\n

A company is never compensated by its shareholders for issuing bonus shares. An amount equivalent to the bonus issue’s value is debited from the reserve or profits and credited to the Equity Share Capital Account.<\/p>\n

<\/span>What are the Benefits of Bonus Shares?<\/span><\/h2>\n

Bonus shares offer several benefits to the shareholders and investors. Here is a list of advantages of bonus shares<\/strong>:<\/p>\n

<\/span>Advantages for the Company<\/span><\/h3>\n

The following are certain benefits a company can reap by issuing bonus shares:<\/p>\n

    \n
  1. \n

    Increases Share Capital
    \n<\/strong><\/h4>\n

    When a company issues bonus shares, it increases its share capital without incurring extra cash flow. It helps the company to effectively increase its share capital by issuing additional shares to its current shareholders. Hence, it is a cost-effective way for the company to expand its capital.<\/li>\n

  2. \n

    Improves Market Liquidity<\/strong><\/h4>\n

    If a company issues bonus shares, it increases the total number of shares available for trading in the market. Therefore, it will increase the share liquidity in the market. It can be seen that higher liquidity makes a stock more attractive and accessible to investors, as they can easily buy and sell it.<\/li>\n

  3. \n

    Enhances Market Capitalisation<\/strong><\/h4>\n

    The declaration of bonus shares by a firm does not result in any change in its existing market capitalisation. However, the distribution of bonus shares can potentially lead to an increase in the market capitalisation of the firm through better scope for investors to trade. If the trading volume increases, so will investors\u2019 interest.<\/li>\n

  4. \n

    Improves Shareholder Trust and Brand Image<\/strong><\/h4>\n

    When a company distributes bonus shares to its existing shareholders, it can enhance the shareholders\u2019 trust and the company\u2019s brand image. It initiates trust among the shareholders that the company is financially successful and willing to share its profit among investors. Hence, it improves shareholders\u2019 loyalty and promotes a positive relationship between both parties.<\/li>\n<\/ol>\n

    <\/span>Advantages for the Shareholders<\/span><\/h3>\n

    The following points highlight the advantages of bonus shares<\/strong> for investors:<\/p>\n

      \n
    1. \n

      No Cash Outflow<\/strong><\/h4>\n

      Investors prefer bonus shares as they get additional shares without paying anything extra. It implies that they can increase their holding in the company without putting in additional capital. This is useful for investors who need to enhance their investments without stretching their finances too thin.<\/li>\n

    2. \n

      Enhanced Portfolio Size<\/strong><\/h4>\n

      Usually, a bonus issue increases the number of shares held by an investor, leading to a larger portfolio size. It can enhance the overall value of their holding, particularly if the company performs well after the issue. A larger portfolio can also lead to increased diversification and risk management.<\/li>\n

    3. \n

      Tax Efficiency<\/strong><\/h4>\n

      Bonus shares may be more tax-efficient than cash dividends. Investors do not need to pay immediate taxes on bonus shares because taxes are typically deferred until the shares are sold. It can lead to increased tax planning opportunities and reduced overall tax costs for investors in the long run. However, they must pay the capital gains from sales.<\/li>\n

    4. \n

      Price Adjustment<\/strong><\/h4>\n

      Share prices typically fall proportionally following a bonus share issuance to reflect the increased number of shares available in the market. However, this adjustment does not alter the overall value of the investment. Investors like the sense of continuity because their overall investment value remains intact despite the share price adjustment.<\/li>\n<\/ol>\n

      <\/span>What are the Different Types of Bonus Shares?<\/span><\/h2>\n

      The following are the different types of bonus shares<\/strong>:<\/p>\n

      <\/span>Fully Paid Bonus Shares<\/span><\/h3>\n

      Fully paid bonus shares are distributed to investors at no additional cost based on their existing holdings. These shares are issued from various sources, including profit and loss accounts, capital reserves, capital redemption reserves, or security premium accounts. This distribution enhances shareholder value without requiring further investment.<\/p>\n

      <\/span>Partly Paid Bonus Shares<\/span><\/h3>\n

      Partly paid bonus shares differ from fully paid shares as they are not fully paid up to the total issue price. Investors can acquire these shares without paying the full amount upfront. The outstanding balance can be settled in instalments when the company issues a call for payment.<\/p>\n

      <\/span>What is the Impact of Bonus Shares on Shareholders and Market?<\/span><\/h2>\n

      After understanding what are bonus shares<\/strong>, you must have a look at their impact on shareholders and the market. Here is how bonus shares impact the shareholders and the market:<\/p>\n

      <\/span>Impact on Shareholder Value<\/span><\/h3>\n

      Although shareholders warmly welcome bonus issues, they can still significantly affect their investment value. For instance, every shareholder will own more shares but also experience an increased dilution of ownership because each owner’s proportionate stake is diminished with every extra issue.<\/p>\n

      Furthermore, bonus issues impact a company’s earnings per share (EPS)<\/a><\/strong>. With more shares released into circulation, the same amount of earnings is spread over a larger base, potentially reducing EPS. Therefore, this may affect investor perception and negatively influence the portfolio of an investor.<\/p>\n

      <\/span>Impact on the Market<\/span><\/h3>\n

      The announcement of bonus issues typically elicits strong reactions in the stock market<\/a><\/strong>. Initially, investors may respond positively, viewing the bonus issue as an indicator of the company\u2019s financial stability and promising future. However, the subsequent effects on stock prices can be more nuanced.<\/p>\n

      The increase in total number of shares resulting from a bonus issue alters the supply and demand dynamics. With a greater number of shares available, supply rises. If demand remains unchanged, this surplus can exert downward pressure on stock prices. Conversely, if the bonus issue is well-received and enhances investor confidence, demand for the company’s shares may increase, potentially mitigating the dilution effect.<\/p>\n

      <\/span>What is the Process of Issuing Bonus Shares?<\/span><\/h2>\n

      Here is the process of issuing bonus shares to existing shareholders of a company:<\/p>\n

      <\/span>Step 1: Call a Board Meeting<\/span><\/h3>\n

      Convene a meeting of the board of directors to discuss the following:<\/p>\n