Bonus Issue

Shares issued free of charge to shareholders is called a bonus issue. These shares are issued in a certain proportion to the existing holdings, i.e., a 2 for 1 bonus indicates that for every one share of the company held by the shareholder, he is entitled to two additional shares. Bonus shares are issued out of the free reserves of the company, which is accumulated by retaining part of its profit over the years. The main advantage of a bonus issue is that the stock becomes more liquid as there will be many more shares to buy and sell. Bonus shares dilute the market price of the shares in direct proportion to the increase in the total number of shares on issue.

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