Bonus shares are issued by using on the free reserves of a company. Companies accumulate its reserves by retaining part of its profit over the years (the part that is not paid out as dividend) and it soon gets ‘large enough’. When the company issues Bonus shares, the reserves will converts into the capital (‘capitalization’). Finally, you are also not paying for this and the company's profits are not affected.
Does it impact Stock Price?
Bonus Shares issue adds to the total number of shares in the market. If a company had 10 lakh shares, with a bonus issue of 2:1, there will be 20 lakh additional shares resulting in a total of 30 lakh shares. The earnings of the company will have to be divided by this new number of shares.
Earnings per Share (EPS) = Net Profit/ Number of Shares
As the profit remains the same and the number of shares increases, the value of EPS is expected to 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.
Whenever Bonus shares are issued the stock becomes more liquid making it easier to buy and sell.
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.
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