What is Bonus Share? A Complete Beginner's Guide
Bonus shares are one of the most commonly discussed topics among Nepalese investors. Investors often hear that a company has announced a certain percentage of bonus shares, but many beginners are unsure what it actually means.
What is a Bonus Share?
A bonus share is an additional share distributed by a company to its existing shareholders without requiring them to pay the issue price for those shares.
Bonus shares are generally issued by capitalizing eligible reserves or other amounts according to applicable rules.
For example, if a company announces a 10% bonus share, an eligible shareholder may receive 10 additional shares for every 100 shares held, subject to the company's announced terms.
Example of Bonus Shares
Suppose you own:
500 shares
The company announces:
10% bonus shares
Your bonus entitlement would be:
500 × 10% = 50 shares
After the bonus shares are credited, your total holding would become:
500 + 50 = 550 shares
Why Do Companies Give Bonus Shares?
Companies may issue bonus shares for several reasons, including:
- Increasing paid-up capital
- Capitalizing reserves
- Rewarding existing shareholders
- Meeting capital requirements
- Improving the company's capital structure
The exact reason depends on the company's financial and regulatory requirements.
Are Bonus Shares Free?
From the shareholder's perspective, no additional purchase price is generally paid for the bonus shares.
However, it is important to understand that receiving bonus shares does not automatically mean that the shareholder's total investment value increases by the same percentage.
When additional shares are issued, the market price can adjust.
Bonus Share Example
Suppose you own 100 shares trading at Rs. 500 each.
Your holding is worth:
100 × Rs. 500 = Rs. 50,000
If the company gives a 10% bonus, you receive 10 additional shares.
You now have:
110 shares
The market price may adjust after the bonus issue, so the value of your investment does not simply become Rs. 55,000 just because you received 10 additional shares.
Bonus Share vs Cash Dividend
A cash dividend gives shareholders money.
A bonus share gives shareholders additional shares.
For example:
Cash dividend: Receive money.
Bonus share: Receive additional shares.
Both can be ways of distributing value to shareholders, but they work differently.
Important Dates
Investors should pay attention to announcements regarding:
- Book closure
- Eligibility
- Annual general meeting approval
- Regulatory approval where applicable
- Bonus-share listing
- Credit of bonus shares to Demat accounts
Final Thoughts
Bonus shares increase the number of shares held by eligible shareholders without requiring them to purchase the additional shares at the normal issue price.
However, investors should not assume that bonus shares automatically create additional wealth. The market price and company's future performance remain important.
