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The term 'Bonus' automatically makes heads turn, but what does it mean in Stock Market terms? As the name suggests, Bonus Shares are additional shares given by any company to its existing shareholders.
Welcome to our new series, Learn with Upstox!
I’m Aaditya Iyengar and in this series, we’ll be discussing some key aspects of fundamental analysis, corporate actions and some other important general concepts about the stock market.
Let’s discuss the topic of bonus shares, in which we are going to talk about - what are bonus shares? When does a company give them? And who are they given to?
What are bonus shares?
Just as the name suggests, they are extra shares given along with the shares you already own of any company. This bonus is very simple, it means a free share. Any company, from time to time, declares a bonus share instead of a dividend.
For example, if you’ve bought one share of any company for Rs. 1,000 and the company declares a 9:1 bonus, it means that you will now get 9 free shares for every one share you own.
Now, does that mean you will have 10 shares worth Rs. 1,000 each? Of course not. The stock price will come down in a similar proportion. A Rs. 1,000 stock will come down to the Rs. 100 ranges because now you will have 10 shares on the same investment of Rs. 1,000.
Why does a company do this?
Simply said, it’s to make the share more affordable for smaller investors like you and me.
Here’s an example, 1 share of MRF Tyres is worth Rs. 90,000! Not everyone can afford to designate such a big amount for just one share of a company in their portfolio. Hence, if a 9:1 bonus is declared, we can all possibly get an MRF share, because it will be somewhere around the Rs. 9,000 range.
Another reason is to improve the liquidity in the stock. Now that there is more supply in terms of quantity, and the stock is affordable for small investors like us, this causes more retail participation, which might also result in the increase of the stock price.
Stock bonuses are also ways for companies to better distribute their shareholding.
When are bonus shares given and to whom?
The big question here is, does every share buyer get bonus shares after such an announcement? Not exactly.
The company announces a record date, and you are only eligible to receive the bonus if you have those shares on or before the record date.
You’ve probably heard of Infosys, one of India’s biggest IT firms. Up until today, they’ve announced bonus shares 8 times. Had you bought Infosys shares since they hit the markets back in 1993, you would have had approximately 512 shares for every 1 share you owned today.
That’s it for now. I hope you learned something today. If you find value in these videos, like, share and subscribe to our channel. If you have any questions regarding the video, do leave a comment on our video.