What is bonus share and how does it affect the company and its shareholders?

A bonus share issue is an offer of free extra shares to existing shareholders. A company may decide to distribute further shares as an alternative to increasing the dividend payout.

When a company issues bonus shares, the number of shares held by the investor increases in proportion.

For example, 1:1 bonus means the number of shares double. 4:5 bonus means for every 5 shares held by an investor, he/she will get 4 shares.

The value of investment remains the same even after a bonus share issue.

For example, an investor has 50 shares, the company issues 1:1 bonus. Then the shares by the investor would double and become 100. The price of the shares of that company at that time was Rs. 100.

So before bonus issue,
· No. of shares = 50
· Share price = Rs. 100
· Value of Investment = Rs. 5,000

And after bonus issue,
· No. of shares = 1000
· Share price = Rs. 50
· Value of Investment = Rs. 5,000
This is so because when a bonus share is announced the price of the shares of that company gets reduced in the same proportion.

From Company Side: 

Effects of Bonus Share issue:-
· Market Value (Share price) = Reduces in proportion to the bonus shares issued
· Face value of the share = Remains the same
· Share Capital = Increases by [Face value × No. of bonus shares]
· Reserves = Decreases by [Face value × No. of bonus shares]
· Total Shares = Increase in proportion to the bonus shares issued
· Value of Investment of an investor (or Market cap of the company) = Remains the same

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