What is bonus share in stock market ?
Bonus shares are additional shares given to the share holder without any additional cost based upon the number of shares that he owns in the specific stock. For example, if an Investor XXX owns 50 stocks in a Company YYY and if that company declares a bonus of 1:1 then he will get an additional 50 stocks of that company at no extra cost. So he will have a total of 100 shares after ex-bonus date. Similarly if the company declares 4:1 bonus then he will get additional 200 shares at no extra cost and his total holding will increase to 250 in this case.
When / Why does a company issue bonus ?
Companies start accumulating a part of their profit and build up their reserves. After sometime, the reserves increase and if the company wants to convert this reserved money to market capital then they issue bonus to share holders.
Bonus shares are issued to increase the companies equity base and retail participation. When the value of the stock becomes high, it makes it difficult for ordinary people to buy the stock at higher prize thus there will be less new investors who will be investing in their stock. Reduced prize after bonus attracks new investors to invest in their company.
Why does stock prize fall after bonus ?
Bonus issue increases the total number of shares for that particular company in the market. For example if a company has 100,000 shares and it declares 1:1 bonus then its number of shares increase to 200,000. This is refered to as dilution in the equity. Now the earnings of that company has to be shared with that much more additional shares. The profit of that companybmay remain same but since the number of shares increased, the EPS (Earnings Per Share) will decline. Theoritically if the EPS declines, the stock prize of that company should also decline proportionately. But in reality, it may / may not happen. Even if the stock prize declines for a short term, it will eventually increase in long run because bonus issue will liquidate its equity hence there will be more buy and sell. Bonus issue also sends a signal that the company is ready and is in a position to service its large equity.
What is the difference between split and bonus ?
A bonus is a free additional share. A stock split is the same share split into two. So, if you own a company share and if it announces bonus then you have reasons to celebrate. But dont celebrate when they split because it is just a technical change in the face value of the stock. But if you want to buy more shares, it is a good news for you because now, you will be able to afford them or at least get them cheaper.