Bonus shares are additional shares given to the shareholders without any
additional cost, based upon the number of shares that a shareholder
owns. These are company's accumulated earnings which are not given out in the form of dividends, but are converted into free shares. The
basic principle behind bonus shares is that the total number of shares
increases with a constant ratio of number of shares held to the number
of shares outstanding. For instance, if Investor A holds 200 shares of a
company and a company declares 4:1 bonus, that is for every one share,
he gets 4 shares for free. That is total 800 shares for free and his
total holding will increase to 1000 shares.
Companies
issue bonus shares to encourage retail participation and increase their
equity base. When price per share of a company is high, it becomes
difficult for new investors to buy shares of that particular company.
Increase in the number of shares reduces the price per share. But the
overall capital remains the same even if bonus shares are declared.
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