Legal Definitions - bonus share

A bonus share is an additional share of a company's stock that is given to its existing shareholders without any cost to them. Companies typically issue bonus shares by converting their accumulated profits or reserves into share capital. While it increases the number of shares a shareholder owns, it generally does not immediately change the total monetary value of their investment, as the market price per share usually adjusts downwards proportionally. The primary reasons for issuing bonus shares often include rewarding shareholders, increasing the liquidity of the company's stock, or making the share price more accessible to a wider range of investors.

• Example 1: Rewarding Loyal Investors

  Imagine "Green Energy Solutions Inc." has experienced a highly profitable year and wants to acknowledge its long-term investors. Instead of distributing a cash dividend, which would reduce the company's cash reserves, the board decides to issue one bonus share for every ten shares currently held by investors.

  This illustrates a bonus share because an investor who previously owned 1,000 shares of Green Energy Solutions Inc. would receive an additional 100 shares (1,000 / 10 = 100) without having to pay anything. These shares are distributed free of charge from the company's reserves, serving as a reward to existing shareholders and increasing their total number of shares.

• Example 2: Enhancing Stock Liquidity and Affordability

  "Digital Innovations Corp." finds that its stock price has become very high, potentially deterring smaller individual investors. To make its stock more affordable and increase the number of shares available for trading in the market (thereby improving liquidity), the company announces a 1:1 bonus share issue.

  This demonstrates a bonus share issue because an investor who owned 500 shares of Digital Innovations Corp. before the bonus issue would now own 1,000 shares. While the total value of their investment remains the same immediately after the issue (e.g., if the share was $300, they had $150,000; now they have 1,000 shares, and the price per share would theoretically drop to $150, maintaining $150,000), the increased number of shares at a lower price per share makes the stock more accessible and easier to trade for a broader range of investors. This free distribution of additional shares from company reserves is the essence of a bonus share.