Definition and Meaning of Bonus Shares
Definition:- Bonus Shares are Shares distributed by a company to its current or existing shareholders as fully paid equity shares free of Charge
Description / Simple Meaning:- The Simple Principle Behind Bonus Shares is that the total number of equity shares increases with the same proportion of the number of shares held to the number of shares outstanding. For Instance, Mr.A Holds 100 Shares of Company X & Company X Declares Bonus of 2:1 i.e. Mr A will get 2 Bonus Shares for free for Every 1 Share Held. Which is Mr.A will get Another 200 Shares for Existing 100 Equity Shares for free Which will Increase Mr.A total Equity Share Holding in Company X to 300 Shares.
Why Company Issues Bonus Shares?
Companies Issue Bonus Shares to Encourage Investors Participation in Buying their Company’s Stock.
When Price per Share is high, it becomes difficult for retail investors to buy shares of a particular company, Increase in Number of Shares reduces Individual Share Price. But the Total Capital & Ownership of the Company Remains the Same even if the Bonus Share is Issued.
How Bonus Shares Affects Shareholders?
As Discussed in the Earlier Mr A’s Total Shares Increased from 100 to 300 due to Bonus Shares. But does this means Mr A Got Richer by 3x times since is holding went up by 300%?
The Answer is No Because of Bonus Increase total Equity Capital of the Company. If total Equity Shares of the Company X were 10,000 Share & Mr A Held 100 Shares this Meant Mr A was 1% Owner of the Company, But After Bonus Shares Total Equity Shares of Company were 30,000 Shares (Due to 2:1 Ratio) & Mr.A Held 300 Shares in the Company Which Still Means Mr A is 1% Owner of Company X.
So to Conclude Bonus Shares do not affect financially to Shareholders Since their Total Ownership in the Company Remains Same But The Number of Shares they hold the increase in the Ratio of Bonus Shares.
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Hope you are able to understand what is bonus share and how it affects shareholders of a company. If you have any Question do let us know in the comments section below and Thank You very much for reading.