10 Things About Bonus Shares That Confuse an Amateur Investor

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Article by Samin Gurung, Sharesansar Media Officer

In no time, an amateur investor dabbling in the secondary market is overwhelmed with the talks of bonus dividend announcements and the hype that ensues among investor circles.

It is then ingrained within the discussion that a bonus dividend declaration is a good thing for the company and its investors: the higher the percentage declaration, the better.

However, there are numerous things about the bonus dividend declaration that make it hard for an amateur to connect the dots and get a bigger picture. The fact that even experienced investors have misunderstood it in part makes the matter even worse. Thus, this article is penned for the amateur investor who entered the secondary market recently, perhaps in the bull run that started a year ago. Nonetheless, this article may also be used by experienced investors to compare their own understanding of the matter and check if they’ve got it all correct.

1) The first point is for the basics

To start with, a bonus share declaration is a way for companies to pay back their shareholders. Companies may choose to directly distribute a portion of their profit in cash dividends. However, there are limits to how high a company can distribute cash. Furthermore, it is understood from a value investing standpoint that a company that chooses to distribute all its profit in cash does not know what to do with the money. By common sense, a company should reinvest its profit to be bigger, better, and more efficient.

This is where the concept of bonus share comes in. Distributing bonus shares is a way for a company to pay back its shareholders without actually sending a cash deposit their way. A company can choose to distribute, say 20% bonus shares, and the shareholder will have 20% more shares after a bonus declaration than he had when he bought the shares.

If an investor had 100 shares before a 20% bonus declaration, he’s now going to have 120 shares in total after bonus distribution.

The entire procedure and timeline of bonus share distribution isn’t the primary focus of this article. Investors who need to educate themselves with that first will find answers here and here.

However, things aren’t this clean and simple. An investor can’t sell his 120 shares at the same price that he’d have sold the 100 shares. In other words, an investor isn’t suddenly gifted with 20 times the share price worth of profits. This is because these bonus shares will have to be listed at an adjusted price, and they take the stock price of the company down. All this will be explained in the following points.

2) Issuing Bonus shares is considered a form o


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