What is Bonus Share? – How to Get FREE SHARES from a Company??

What if you get FREE shares from a company? Wouldn’t that be great?

Yes, there are some companies that offer shares free of cost. Such shares are called bonus shares. It’s similar to buying something and finding out that there is a gift inside the package.

Everyone loves free stuff.

But there’s a catch to get free Bonus Shares. You just need to follow some instructions and gather knowledge on the topic. Luckily all you need to do is read this article. 

So let’s get you some free shares.

Content:

• Bonus Shares Meaning
• How are Bonus Shares Issued?
• What is Bonus Issue?
• What is Stock Split?
• What is Record Date?
• What is Ex-Bonus Date?
• What is Bonus Date?
• Top Bonus Share Giving Indian Companies
• Advantages of Bonus Shares
• Quick Summary

Bonus Shares Meaning

So, what are bonus shares? Bonus shares are additional shares issued to the existing shareholders in proportion to the number of shares they previously own with no extra cost. Usually, Bonus shares are issued as an alternative to dividend payments when a company is low on cash reserves. They are declared in ratios of 1:2, 1:3, 4:1, 5:8, etc.

How are Bonus Shares Issued?

There are two ways in which a company issues bonus shares.

• Bonus Issue
• Stock Split

What is Bonus Issue?

A bonus Issue is an act where the company gifts its shareholders with additional shares in proportion to the volume of shares they own. They are generally in the form of 2:1, 3:1, 5:1, etc.

To understand the bonus issue better, let’s consider an example:

Assume Mohan has 100 shares worth Rs.10 each in a company, and the bonus issue ratio declared by the company is 5:1. This means for every 1 share he owns; the company will gift him 5 shares (1 x 5 shares). So the total shares Mohan will have after the bonus issue will be 500 shares (100 x 5 shares).

With the increase in the number of shares, the price of the shares will decrease proportionally but the total value of shares will remain unchanged.

To understand the valuation of shares, read our article on the Valuation of Shares.

Here’s how it works: 

Share price before Bonus Issue: 100 Shares x ₹ 10 per share = ₹ 1000

Share price after Bonus Issue: 500 Shares x ₹ 2 per share (₹ 1000/500 Shares) = ₹ 1000

What is Stock Split?

In a stock split, no new shares are issued. Instead, the old shares are split in a predefined ratio in the form of 1:2, 1:3, 1:5, etc. This is practiced to increase the number of outstanding shares of the company.

Again, let’s consider an example to understand this better. Rohan has 100 shares at Rs.10 each in a company, and the company announces a stock split of 1:2. Now Rohan’s 100 shares will be split into 2 parts and become 200 shares, i.e., each share will become 2 times the actual shares.

The number of shares increases, but the overall value of the investment remains the same.

Check out the calculations below to understand how!

Share price before Stock Split: 100 Shares x ₹ 10 per share = ₹ 1000

Share price after Stock Split: 200 Shares x ₹ 5 per share (₹ 1000/200 Shares) = ₹ 1000

There’s a very thin line between bonus issue and stock split. I hope you are clear on that.

But does this mean all the shareholders would get the bonus shares?

No, not everyone would get the benefit of a bonus share. There are certain dates which are to be taken care of:

• Record Date
• Ex-Bonus Date
• Bonus Date

To get a complete understanding of Stock Split, read our blog on Stock Split Meaning. 

What is Record Date?

The record date is the cut-off date set by the company to be eligible for bonus shares. All the shareholders who have the shares in their Demat Account on the record date will be entitled to receive bonus shares from the company.

What is Ex-Bonus Date?

If you want to be eligible for the bonus share, you have to buy the shares at least one day before the ex-bonus date. 

What is Bonus Date?

It is a date on which the company will credit the bonus shares to the shareholders’ Demat Account. It can be between 1-30 days from the Record date.

We appreciate your enthusiasm, now you might be wondering which company gives bonus shares? The next section of the article answers this question. Keep reading and find it yourself.

Top Bonus Share Giving Indian Companies 

A tabular form of top bonus shares giving Indian companies in 2021 has been mentioned below, along with the record date and ex-bonus date.

Advantages of Bonus Shares

• Bonus shares are tax-free for the shareholders.
• In the long term, there’s a good chance to increase the investment as the number of shares are increasing.
• In the time of declaration of dividend, the shareholder may get higher dividends as the number of shares has increased after the bonus shares are allotted.

When it comes to financial investment, shares or equities are one among many. To be an informed investor, you need to have complete knowledge about all the financial instruments and what purpose do each one of them serve. Only then will you be able to build a solid portfolio. Click here to read about what is portfolio in the stock market.

We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, and hence we bring you the important topics and areas that you should know:

Disclaimer: The above article is written for educational purposes, and the companies’ data mentioned in the article may change with respect to time. The securities quoted are exemplary and are not recommendatory.

Quick Summary

• Bonus shares are additional shares issued to the existing shareholders in proportion to the number of shares they previously own with no extra cost.
• Usually, Bonus shares are issued as an alternative to dividend payments when a company is low on cash reserves.
• There are two ways in which a company issues bonus shares.
  • Bonus Issue
  • Stock Split
• All the shareholders get the bonus shares? No, not everyone gets the benefit of a bonus share. There are certain dates which are to be kept in mind:
  • Record Date
  • Ex-Bonus Date
  • Bonus Date
• Talking about the Advantages of Bonus Shares, they are tax-free for the shareholders. In the long term, the investment will be increasing as the number of shares are also increasing. The shareholder may get higher dividends as the number of shares has increased after the bonus shares are allotted.