What is a Bonus Issue and Why It Matters

If you own stock in a company and hear the word “bonus issue,” you might wonder what’s happening to your investment. A bonus issue, also called a scrip issue or a stock dividend, is when a company gives existing shareholders extra shares for free. No cash changes hands, but the total number of shares you own goes up.

Why Companies Issue Bonus Shares

Companies use bonus issues for a few simple reasons. First, they want to reward shareholders without spending cash. If a firm has built up retained earnings, turning those earnings into additional shares shows confidence and keeps shareholders happy.

Second, a bonus issue can make a stock’s price look more affordable. When a company splits its shares, the price per share drops, which can attract small investors who think the stock is now cheaper, even though the market value stays the same.

Third, it can improve liquidity. More shares floating in the market mean it’s easier for people to buy and sell, which can tighten bid‑ask spreads and make trading smoother.

How a Bonus Issue Affects You

When a bonus issue is announced, the company will state a ratio, like 1:2 or 2:5. A 1:2 bonus means you get one extra share for every two you already own. Your total holding grows, but the share price adjusts downward so the overall value remains roughly unchanged.

For example, if you own 100 shares at $50 each and the company announces a 1:1 bonus, you’ll end up with 200 shares. The price will likely fall to around $25, keeping your investment at about $5,000.

Tax rules vary by country, but in many places bonus shares are treated as a re‑allocation of existing equity, so you don’t pay tax when you receive them. However, when you later sell the bonus shares, the cost basis may be split between the original shares and the bonus shares, so keep an eye on your broker’s statements.

One practical tip: update your portfolio tracker as soon as the bonus shares are credited. Some platforms automatically adjust the cost basis for you, but double‑check to avoid surprises at tax time.

Bonus issues can also affect your voting power. Since you own more shares, you usually get more votes at shareholder meetings, which can be useful if you’re active in corporate governance.

Lastly, don’t mistake a bonus issue for a stock split. Both increase the number of shares you own, but a split changes the share count without creating new equity, while a bonus issue actually adds fresh equity from retained earnings.

In short, a bonus issue is a free‑share giveaway that can make your holding look bigger, keep the price affordable, and boost a stock’s liquidity. It’s a win‑win for many investors, provided you understand the price adjustment and the tax implications.

Keep an eye on company announcements, read the fine print, and adjust your portfolio accordingly. Bonus shares might not instantly increase your wealth, but they give you a larger piece of the company’s future growth without costing you a cent today.