5:1, 3:5, 1:10, 4:1, 1:2 Are Some Popular Bonus Shares Ratios: Impact And Benefits On Stock Price, Investors!

Bonus shares are one of the many corporate actions that listed companies announce on several occasions. Bonus shares are like incentives which are free of cost given to investors. Under this corporate action, new shares are issued at the existing Face Value of equity shares of the company. Hence, the face value remains the same post-bonus issue.

Some of the very popular bonus shares ratios are -- 4:1, 1:2, 3:5, 1:10, and 5:1.

In the case of a 4:1 bonus share, the company issues four new bonus shares compared to 1 existing equity share. So let's suppose, if you had 500 equity shares of a company, and were eligible for the bonus issue of 4:1, then you will receive 2000 equity shares (2,000 X 4/1).

The case is the same for 5:1 bonus shares, where five new shares will be given on 1 existing shares. So, 500 existing shares will receive 2,500 bonus shares (500X 5/1).

When the numbers are higher on both cases for instance 3:5 bonus shares ratio -- it means that three new shares will be allotted on five existing shares. So, 500 equity shares will receive 300 equity shares (500X3/5).

But when the bonus issue ratio is 1:10 where only 1 bonus share will be allotted on every 10 existing shares, the example of 500 shares will receive only 50 shares (500X1/10). Similar is the case with the 1:2 bonus ratio, where 1 bonus share is given for 2 existing shares, the 500 shares will receive 250 bonus shares (500x1/2).

As per Religare Brokerage, the following are the impact of bonus shares on investors:

1. No Tax Liability: Unlike taxable dividends, bonus shares have no immediate tax implications for the shareholder.

2. Capital Appreciation: Over the long term, as the company continues to grow, the value of the original and bonus shares may appreciate, offering higher returns.

3. Increased Ownership: The issuance of bonus shares increases a shareholder's stake in the company without requiring additional investment.

Further, Religare on its website explained the advantages of bonus shares. They are:

1. The issuance of bonus shares increases the number of shares in circulation, thus enhancing liquidity.

2. The share price typically decreases post-bonus issuance, making it more affordable for new investors.

3. Bonus shares improve relations with existing shareholders as they feel rewarded.

4. For shareholders, bonus shares are generally not taxable until sold, unlike dividends, which are taxable when received.

5. For companies, issuing bonus shares helps optimise the capital structure without affecting cash reserves.

Further, Religare highlighted what happens to stock price when bonus shares are issued:

1. The announcement of bonus shares usually leads to increased trading volumes, and often, the share price sees a short-term surge due to the positive sentiment.

2. The share price adjusts to account for the additional shares issued on the ex-date. For example, if the bonus ratio is 1:1, the share price will approximately halve.

3. The company's overall market capitalisation remains the same immediately after the bonus shares are issued. The price per share decreases, but the number of shares increases proportionately.

4. The increase in shares improves liquidity, making the stock more accessible to small investors, which can result in higher trading volumes.

5. The reduced share price post-bonus can make the stock appear more 'affordable,' attracting new investors even though the company's intrinsic value remains unchanged.

6. Over the longer term, the impact on the share price depends on the company's performance. If the company continues to perform well, the share price and overall market capitalisation may increase, benefitting both original and new shareholders.

7. Since the number of shares has increased, the EPS will reduce proportionately, which some investors may view negatively. However, this is a mathematical outcome of the bonus issue and not necessarily a reflection of the company's health.

8. Finally, how investors perceive the issuance of bonus shares can also influence the share price. If the issuance is seen as a sign of the company's confidence in its prospects, it can positively impact the share price in the long term.

Disclaimer: The write-up just highlights about the bonus shares ratio and is not a recommendation to buy, sell or hold. We have not done fundamental or technical analysis and have no opinion on the stock mentioned. Neither, the author nor Greynium Information Technologies should be held liable for any losses. Please consult a professional advisor.