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Bonus Issue

Intermediate

The Short Version

A bonus issue is when a company gives existing shareholders additional shares for free, in a fixed ratio (e.g., 1:1 or 2:1), by converting part of its accumulated reserves/retained earnings into share capital. It doesn't change any shareholder's proportional ownership or the company's total value — it simply divides the same pie into more, smaller slices, typically to improve the stock's affordability and trading liquidity.

Explain It Like I'm 10

Imagine you own 1 of the 10 slices of a pizza. The pizzeria decides to cut every slice in half, so now there are 20 smaller slices — and since you owned 1 of the original 10, you now own 2 of the 20. You still own exactly 10% of the whole pizza, and the pizza itself is exactly the same size as before — you just have more, thinner slices representing that same ownership. A bonus issue works the same way with company shares.

Step-by-Step Example

  1. 1 You own 100 shares of a company trading at $60 each — your holding is worth $6,000.
  2. 2 The company announces a 1:1 bonus issue with a record date next month.
  3. 3 You own the shares before the ex-date, so you qualify — you receive 100 additional free shares, for 200 total.
  4. 4 The share price adjusts down proportionally, roughly to $30 per share (since the same company value is now split across double the shares).
  5. 5 Your total holding is still worth about $6,000 (200 shares × $30) — you're not wealthier from the bonus issue itself, but you now hold more, more affordable shares.
Textbook Example

In a 1:1 bonus issue, a shareholder holding 100 shares receives 100 additional free shares, ending up with 200 shares total.

Quick Recap

  • ✓ Total shareholder value is unchanged immediately after a bonus issue — share price adjusts down proportionally as share count goes up.
  • ✓ It's funded from the company's own reserves, not from any new outside investor's cash.
  • ✓ Bonus issues are often read as a signal of management confidence and are typically paired with an ex-date/record date, exactly like a dividend.
  • ✓ Not to be confused with a stock split (covered next) — the accounting mechanics differ, but the practical effect on shareholders is very similar.
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