BONUS ISSUE
Back to GlossaryDefinition
A stock dividend paid in additional shares rather than cash, increasing shares outstanding.
Summary
A bonus issue is when a company gives existing shareholders additional shares for free instead of paying cash dividends. Think of it like getting extra slices of the same pizza - you have more pieces, but the total pizza (company value) remains the same size. The company converts retained earnings into share capital, increasing the total number of shares while proportionally reducing the price per share. For example, in a 1:2 bonus issue, shareholders receive one additional share for every two shares they own.
Usage Context
Understanding bonus issues is crucial when analyzing corporate finance decisions, dividend policy, share valuation, and the impact of corporate actions on investment portfolios. This concept is particularly important in equity analysis and understanding how companies reward shareholders.
Common Confusions
- Thinking bonus issues increase shareholder wealth (they don't - it's just repackaging existing value)
- Confusing bonus issues with stock splits (both increase shares but have different accounting treatments)
- Believing the stock price will remain unchanged after a bonus issue
- Mixing up bonus issues with rights issues (bonus shares are free, rights issues require payment)
