What Is a Bonus Share and How Do Bonus Shares Work?

Investing in the stock market involves understanding various corporate actions that can influence shareholding patterns and long-term returns. One such commonly discussed corporate action is the issuance of bonus shares. To receive and hold such corporate benefits, investors must open demat account online, as all equity shares, including bonus shares are credited electronically. Investors often ask what a bonus share is, how it works, and whether it actually adds value to their investment.

In the Indian equity market, bonus shares are frequently used by companies with strong reserves to reward shareholders without distributing cash. Understanding what a bonus in the share market is helps investors interpret corporate announcements accurately and avoid misconceptions around “free shares”.

While bonus shares increase the number of shares held, they come with specific implications for share prices, taxation, and portfolio structure.

Additional Read: What is Trading Account?

What are Bonus Shares in the Indian Market

To understand what a bonus share is, it is essential to examine how bonus issues operate within the Indian stock market framework. A bonus share is an additional equity share issued by a company to its existing shareholders without any additional cost. These shares are allotted in a predetermined ratio and are issued by capitalising the company’s accumulated reserves instead of paying cash dividends.

In practical terms, a bonus in the share market refers to a corporate action where a company converts a portion of its free reserves or securities premium into share capital. As a result, shareholders receive additional shares in proportion to their existing holdings, while their percentage ownership in the company remains unchanged.

From a regulatory standpoint, the bonus share definition in India is governed by SEBI guidelines, which allow bonus issues only out of free reserves, capital redemption reserves, or securities premium collected in cash. So, what bonus shares mean for investors is not an increase in immediate wealth, but a restructuring of the company’s equity that improves liquidity and signals financial stability.

Bonus Shares:  List of Upcoming Bonus Shares

How Bonus Shares Work?

Understanding how bonus shares work helps investors manage expectations around post-bonus price movements and portfolio value. When a company announces a bonus issue, it specifies the bonus ratio, record date, and ex-bonus date. Eligible shareholders automatically receive bonus shares in their demat accounts without any action required from their side.

The share price adjusts after the bonus issue to reflect the increased number of shares in circulation. As a result, the total market capitalisation of the company remains broadly unchanged immediately after the bonus issue, assuming no change in market sentiment. This bonus share mechanism ensures that all shareholders are treated equally, and ownership proportions remain intact.

Additional Read: How to Start Online Trading in India?

Bonus Ratio and Its Significance

The bonus share ratio defines how many additional shares a shareholder receives for every share held. Common bonus ratios include 1:1, 2:1, or 3:2.

A 1:1 bonus share means that a shareholder receives one additional share for every share owned. For example, if an investor holds 100 shares of a company that declares a 1:1 bonus, they will receive 100 additional shares, taking the total holding to 200 shares. If the share price before the bonus was ₹500, it may adjust to approximately ₹250 after the bonus, subject to market conditions.

The bonus ratio is significant because it helps investors estimate their revised shareholding and understand price adjustments following the bonus issue.

Also Read: Types of Trading in the Stock Market in India

Ex-Bonus Date and Record Date Explained

The record date for bonus shares is the date set by the company to identify eligible shareholders. Investors whose names appear on the company’s shareholder register on this date are entitled to receive bonus shares.

The ex-bonus date is typically one trading day before the record date. Shares purchased on or after the ex-bonus date do not qualify for the bonus issue. Understanding the ex-bonus date is crucial for investors planning trades around bonus announcements, as eligibility depends on settlement timelines.

Additional Read: What is Online Stock Trading?

Why Do Companies Issue Bonus Shares?

Companies issue bonus shares for strategic and financial reasons rather than to generate immediate shareholder returns.

Common reasons for bonus shares include:

• Capitalising accumulated reserves
• Rewarding long-term shareholders
• Increasing the number of outstanding shares
• Improving liquidity and affordability
• Signalling financial strength and stability

Rewarding Shareholders Without Cash Outflow

Issuing bonus shares instead of dividends allows companies to reward shareholders without reducing their cash reserves. This is particularly useful for companies that want to reinvest profits into growth opportunities while still acknowledging shareholder loyalty. From a shareholder perspective, bonus shares act as a long-term reward rather than immediate income.

Increasing Liquidity and Attracting Retail Investors

By increasing the number of shares in circulation, bonus issues lower the post-adjustment share price, making the stock more accessible to retail investors. Improved affordability enhances bonus shares liquidity, often leading to higher trading volumes and broader market participation.

Signalling Financial Strength and Growth

Bonus issues are generally perceived as indicators of strong reserves and consistent profitability. While not a guarantee of future performance, bonus shares and financial health are closely linked in investor sentiment, as companies with weak balance sheets are unable to issue bonus shares.

Additional Read: What Is Dematerialisation?

Advantages of Bonus Shares for Investors

The advantages of bonus shares make them appealing to long-term investors:

• Additional shares without extra investment
• Increased liquidity in the stock market
• Improved affordability post-adjustment
• Positive signal regarding company fundamentals
• Suitable for long-term equity accumulation

The benefits of bonus shares for investors are most meaningful when viewed as part of a long-term investment strategy rather than short-term gains.

Additional Read: What Are Account Maintenance Charges (AMC) For a Demat Account?

Disadvantages and Considerations of Bonus Shares

Despite their appeal, investors should be aware of the disadvantages of bonus shares:

• No immediate increase in investment value
• Share price adjustment following the bonus issue
• Potential dilution of earnings per share
• Market overreaction in the short term

Understanding these bonus share risks helps investors evaluate bonus announcements objectively rather than relying on perceived “free” benefits.

Additional Read: How to Open a Demat Account?

Bonus Shares vs. Stock Split: Key Differences and Similarities

While bonus shares and stock splits appear similar because both increase the number of shares and reduce the share price proportionately, they differ in structure and intent. Understanding bonus shares vs stock splits helps investors interpret corporate actions more accurately.

In a bonus issue, companies issue additional shares by converting reserves into equity, which increases paid-up share capital. In contrast, a stock split divides existing shares into smaller units without impacting reserves or share capital. This distinction highlights the difference between bonus and split, even though both actions are value-neutral in theory.