What is Bonus Issue?

A bonus issue is an action taken by a company to increase the number of its outstanding shares.

The Company issues new shares to shareholders without collecting any money from them.

For example, if a company declares a bonus issue at a 1:2 ratio, the shareholder would receive one additional share for every two shares held by him/her.

The total number of outstanding shares increases by the number of bonus shares issued.

When a company declares a bonus issue, the stock price usually goes up. The EPS is usually higher than it was before the issue was declared.

Purpose of Bonus Issue

The purpose behind this is to increase the company’s earnings per share and improve its financial performance over time by giving investors more shares in exchange for their initial investment.

The main purpose behind issuing bonus issues is to attract investors and make them buy more shares at a lower price than they would otherwise have done if they had bought just regular ones (or “ordinary” ones).

Understand Bonus Ratio

1:1 Bonus Issue means for 1 share you will get 1 additional share of the company. After the record date, you will have a total of 2 shares of that company if you hold 1 share before the ex-date. And also the stock price will be half after the issue.

2:1 = for every 1 share you will get 2 bonus shares. Similarly, as previously, you will have a total of 3 shares after the record date.

1:2 = for every 2 shares you will get 1 bonus share.

3:2 = for every 3 shares you will get 3 bonus shares. Total 5 shares you will have in your portfolio if you hold 2 shares of that company.