What are Bonus Shares?

Bonus shares are additional shares issued to current shareholders without any additional cost, based on the number of shares each shareholder owns. This is a form of rewarding shareholders from the profit a company earns. These are accumulated earnings of a company not given out in the form of dividends, but are converted into shares.

The basic principle behind bonus share issue is that it increases the total number of shares at a constant ratio to the number of shares held. For instance, if an investor holds 200 shares of a company and the company declares 4:1 bonus shares, he gets 4 shares free for every share held. Thus the 800 free shares would increase his total holding to 1,000 shares.

Companies issue bonus shares to encourage retail participation and increase equity base. When the price per share of a company is high, it becomes difficult for new investors to buy them. An increase in the number of shares reduces the per share price, keeping the overall capital same.