Stock dividend and bonus shares: more shares, same pie

A stock dividend, better known in India as a bonus issue, rewards shareholders with extra shares rather than cash. This guide explains what a stock dividend is and how it affects what you hold.

Quick answer

A stock dividend, commonly called a bonus issue in India, gives shareholders extra shares free of cost in proportion to what they already hold. It does not pay cash. Instead, it increases the number of shares while the price per share adjusts down, so your total value stays broadly the same at that moment.

Key takeaways

• A stock dividend gives extra shares free, not cash.
• In India it is usually called a bonus issue.
• Your share count rises in proportion to your holding.
• The price per share adjusts down after the bonus.
• Your total value stays broadly the same at that moment.

What is a stock dividend?

A stock dividend is a reward paid in shares rather than cash. The company issues extra shares to existing shareholders in proportion to their current holding, at no cost to them.

In India, this is usually called a bonus issue. For example, in a one-for-one bonus, a shareholder receives one extra share for every share held, doubling their share count.

How does it work?

The company uses its reserves, the profits it has kept over time, to issue the new shares. No new money comes in from shareholders, and the company does not pay out cash.

The new shares are credited to your demat account automatically, based on the bonus ratio and your holding on the record date.

How does it affect the share price?

After a bonus issue, the number of shares rises, so the price per share adjusts down in proportion. If shares double, the price roughly halves, keeping your total value about the same at that moment.

So a bonus does not create instant wealth. It divides the same value across more shares, though the lower price can make the shares easier to trade.

Why do companies issue stock dividends?

Companies issue bonus shares to reward shareholders while keeping cash in the business. It can also make the share price lower and more affordable, which may widen the pool of buyers.

A bonus can signal confidence, since it shows the company has healthy reserves. But it is not the same as receiving cash, so it should be understood for what it is.

What should shareholders know?

You need to hold the shares by the record date to receive the bonus. After the bonus, do not be alarmed by the lower price, since your share count has risen to match.

A stock dividend is one of several corporate actions that change your holding, alongside a cash dividend. Any investment decision should be your own after proper research.

Frequently Asked Questions