Share Trading & Bonus Shares

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Share Trading is the buying and selling of shares through stock markets. Through Stock Exchanges, shares can be bought and sold. People see it as an investment platform to earn huge profit with short span of time even though there is risk involved in it. Some companies offer bonus shares to the shareholders which is free of cost.

Bonus Shares:

Bonus shares are issued by the profitable companies to the shareholders free of charge. Shareholders can make benefit out of these shares and which will also create trust on those companies. 

Ratio of Bonus Shares

Ratio of bonus shares given by the companies to the shareholders may vary from company to company. Bonus shares are issued in definite proportion to the existing holding. If a company offers a 2:1 ratio of bonus shares which means that the share holder will get 2 additional shares for free for every one share he holds. Let's say one is holding 100 shares of a company and the company issued a 2:1 bonus share ratio then the share holder will get 200 shares for free, so finally he will be having 300 shares instead of 100.

Issue of Bonus Shares

Companies accumulate reserves by retaining a part of profit, which is not paid out as dividend. Over the years the reserves accumulates and the companies issue this free reserves as Bonus shares to the existing shareholders. When company issue bonus shares the reserves will be converted to capital. The advantage for shareholders is that they are not paying for the bonus shares and company's profit is also not affected.

Bonus Shares and the Stock Price

When a company issues a bonus shares this will add up the total number of shares in the market. lets say that a company has 1 Lakh shares in the market and that comapny issued a 2:1 ratio of bonus shares then there will be 2 lakh share issues, so total no of shares in the market will be 3 Lakh shares. Earnings per share is calculates as follows:

Earnings per Share = Net Profit / No .of Shares

here the net profit remains same and the no. of shares increases as a result value of EPS will go down.

In fact, the stock price should also go down proportionately to the number of new shares. But sometimes, in reality, the share prices may not go down, which gives more advantage to the share holder.

Bonus Share - Good or Bad??

A bonus issue indicates that the company is booming and it is in a position to service its larger equity. Bonus share issue is considered as a positive sign for the company.
Whenever a bonus issue is announced, the company also announces a record date for the issue. Record date is the date on which the bonus shares takes effect, and shareholders are entitled to the bonus shares on that date.

Whenever Bonus shares are issued the stock becomes more liquid. And this make it easier to buy and sell.