Bonus & Stock Split

What are Bonus Shares?

Bonus shares are like a generous gesture from a company to its existing shareholders. They are issued without any consideration from the shareholders themselves, meaning they don't have to shell out a single dime to get their hands on these additional shares. What's even more fascinating is that the value of their holdings remains unchanged, both before and after the bonus issue. It's like getting a delicious slice of cake without it affecting the size of the whole cake!

So, how does one become entitled to these bonus shares? Well, it all depends on your existing shareholding in the company. Let's say the company announces a bonus issue in the ratio of 1:2. This means that for every 2 shares held by you, you'll receive an additional bonus share as a delightful bonus.

Now, you might be wondering, how can a company afford to be so generous? The answer lies in the company's free reserves, which are built from genuine profits accumulated over time. The issuance of bonus shares is essentially the company capitalizing its reserves, utilizing its financial strength to reward its shareholders.

What is Stock Split?

A stock split is a corporate action that reduces the face value of existing shares in a defined ratio. For example, a stock split of 1:10 means that one existing share is split into ten shares. As a result, the face value of each share decreases to one-tenth of its original value.

Let's take an example: If an investor holds 500 shares of a company with a face value of Rs 10 each, a stock split in the ratio of 1:10 will increase the number of shares to 5000, but the face value of each share will decrease to Rs 1.

Companies often opt for stock splits when their share prices in the secondary market are perceived as very high, limiting investor participation. By reducing the price per share after the split, a stock split enhances market liquidity.


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