A bonus share refers to free shares of stock that are extended to the current shareholders of a company, without the need for the shareholder to actually purchase the additional shares, or incur any type of fees to cover the acceptance of the shares. In most cases, the extension of this type of share is based on the current number of shares in the possession of the shareholder. When a company determines to extend bonus shares to shareholders who meet specific qualifications, this is referred to as a bonus issue.
Generally, the bylaws and other legal documents related to the establishment and operation of the company will include specific provisions that relate to the creation of a bonus share issuance. For example, the shares may not be issued for all types or classes of stock. Instead, only certain classes of shares may be able to get some. Often, it is necessary for a company to reach a certain net worth or a prearranged level of profitability before the company documents will allow for the implementation of a bonus share program.
It is important to note that when a bonus share of stock is issued, it does increase the total number of shares that are in the possession of the individual shareholder. However, the the issuance of such a share does not increase the value of the company. Because the company had to attain a given level of value before it was possible to issue even one bonus share, the share simply changes the ratio or percentage of the number of issued shares held by each qualified investor.
In the long term, the bonus share benefits both the company and the shareholder. For the shareholder, the possession of additional shares of stock, which are anticipated to appreciate in value over time, is a nice unexpected extra that has the potential to increase the value of the investment portfolio. For the company, the ability to engage in a bonus share issuance means the profit level of the company has reached a new high and that the outlook for the future is very bright.
