We keep getting queries from investors about what exactly is a bonus issue and what does it mean.
🧵A thread on what a bonus issue is and how it affects your investment👇
🧵A thread on what a bonus issue is and how it affects your investment👇
What are bonus shares?
Bonus shares are free shares issued to the existing shareholders. The bonus shares are issued out of the reserves of the company.
Bonus shares are typically allocated in a fixed ratio such as 1:1, 1:2, 2:1, 3:1, etc.
Bonus shares are free shares issued to the existing shareholders. The bonus shares are issued out of the reserves of the company.
Bonus shares are typically allocated in a fixed ratio such as 1:1, 1:2, 2:1, 3:1, etc.
For example: If a company declares a bonus issue in a 3:1 ratio, then for every 1 share you hold, you will receive 3 additional shares.
Why are bonus shares issued?
Companies typically issue bonus shares to encourage retail participation, increase liquidity, and in some cases, as an alternative to dividends.
Companies typically issue bonus shares to encourage retail participation, increase liquidity, and in some cases, as an alternative to dividends.
Do bonus shares increase the value of my investment?
A bonus issue doesn’t increase the value of your investment. When the bonus shares are issued, the number of shares you hold will increase, but the overall investment value will remain the same.
A few examples:
A bonus issue doesn’t increase the value of your investment. When the bonus shares are issued, the number of shares you hold will increase, but the overall investment value will remain the same.
A few examples:
Two important dates determine your eligibility for a bonus issue: Record date & Ex-Date.
Record date
The record date is the cut-off date set by the company. To be eligible for the bonus shares, you need to have the shares in your demat on the record date.
Record date
The record date is the cut-off date set by the company. To be eligible for the bonus shares, you need to have the shares in your demat on the record date.
Ex-date
Ex-Date is usually one or two business days before the record date. You’ll be eligible for the bonus if you buy the stock 1 day before the ex-date. Since the settlement cycle of shares is T+2 in India, the stocks will hit your demat by the record date.
Ex-Date is usually one or two business days before the record date. You’ll be eligible for the bonus if you buy the stock 1 day before the ex-date. Since the settlement cycle of shares is T+2 in India, the stocks will hit your demat by the record date.
Example
IEX recently announced a bonus. The record date was Dec 6, 2021, & the Ex-date was Dec 3, 2021. To be eligible for the bonus, you had to have the shares in your demat as of the record date, i.e. Dec 6th. So the last date to buy the stock to be eligible was Dec 2nd.
IEX recently announced a bonus. The record date was Dec 6, 2021, & the Ex-date was Dec 3, 2021. To be eligible for the bonus, you had to have the shares in your demat as of the record date, i.e. Dec 6th. So the last date to buy the stock to be eligible was Dec 2nd.
My P&L dropped after the bonus. Does it mean I am at a loss?
No, this is just a temporary artificial price drop until the bonus shares are credited to your demat. Once they are credited, your P&L will be back to normal. So you don’t have to worry about it.
No, this is just a temporary artificial price drop until the bonus shares are credited to your demat. Once they are credited, your P&L will be back to normal. So you don’t have to worry about it.
How long does it take for me to get the bonus shares?
Typically, it can take up to 15 days, but this depends on the RTA (Registrar & Share Transfer Agents) and not the brokers. Once the shares are credited, you will receive an SMS & email from the depositories - CDSL & NSDL.
Typically, it can take up to 15 days, but this depends on the RTA (Registrar & Share Transfer Agents) and not the brokers. Once the shares are credited, you will receive an SMS & email from the depositories - CDSL & NSDL.
Other corporate actions like stock splits and dividends also affect your investment. Check out this chapter to understand how👇
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