Bonus shares are the shares given to the shareholders in proportion to their number of shares. For example, 1: 1 bonus means that a shareholder will get an additional share for each purchased stock. That is, if an investor already has 10 shares then he will get 10 shares. The shareholder will not have to pay anything for these shares. In order to give bonus shares to the investors, the company holds a portion of its profits in the reserve capitals over the years. When these Capital Reserve grows, the company transfers a portion of the reserve to the capital account, from which it issues the bonus shares. By giving bonus shares, companies increase the liquidity of their shares and profit without lowering the capital to the share holders.

Does this always benefit the investors?
In most cases, the share price of the company increases after the bonus issue is issued. In most cases, after the announcement of bonus shares and a year after record date, the stock price may increase.

Changes in stock price after bonus: After the bonus share, the price of the stock changes, which can be called price alignment or price adjustment. Generally after the bonus issue, the stock price of the company is adjusted according to bonus ratio. For example, if the price is 200 rupees before the bonus and the company releases bonus shares in the ratio of 1: 1, then the new value of the stock will be 100 rupees, which means that the total market value (2x Rs 100 = Rs 200 ) Remains the same. After the record date, the price of the stock is expected to increase. However this may not happen as well. In such a condition, the value of 200 rupees will be called a lower bonus price and 100 rupees will be called the X bonus price.

Generally, the bonus issue is considered positive by the investors and the demand for stock increases. If in the next year, the company increases its earnings and maintains the level of earnings per share, which is EPS level at the projected level, the stock will give good returns. After the bonus issue, the number of outstanding shares of the company increases in proportion to the declared bonus and in the same proportion decreases its share per share.

But it is not always necessary that the price of the stock will increase after the bonus issue. The bonus announcement does not have any effect on the company's income, yes the announcement of bonuses reflects the confidence of managers that the company will increase its income according to the increased capital.

When and why are issued?
A company issues bonus shares when there is a great potential to increase its income and thus it is expected that the income will increase even as the capital increases. It increases liquidity and retail participation. This means more stocks will be available in the market and more investors will be attracted to these stocks.

Things to know about Bonus Issues
X bonus
This is the date after the record date on which the stock price is adjusted on the stock exchanges according to the bonus ratio.

Record date
The cut-off date set by the company to determine who is eligible to receive bonus shares. If you hold shares in your demat account on this date only then you get the benefit of bonus shares.

Should we buy shares of the company that declares a bonus share?
If you want to buy shares of companies who are going to announce bonus issue, then stop. No investor should buy the shares solely on the basis of the declaration of bonus shares unless you are unsure about the company's basic growth and income growth.

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Author's Bio: 

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