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Some companies are also known to take recourse to issuing types of bonus shares when they feel that the existing prices on the bourses have spiked up so high that they are well and truly out of reach of the common man. They say that there is nothing in life that can be had for free, but this maxim seems to have not taken the workings of the stock market into consideration. Companies that have a presence there have multiple ways by which they reward investors that remain loyal to them. The most common example of this is the dividend that is doled out at the end of the year. However, there is one other carrot and an important one at that, which companies use at times, wielding it carefully to ensure that its value holds well over time. This is done through a complimentary give away of shares to investors as a token of goodwill towards the faith showed by them in the functioning of the firm. Needless to say, bonus share announcements only happen when companies have been through good times and have recorded a significant profit on their books. Such dole-outs are issued by a pre-fixed ratio, usually in the form of 1:1, 2:1, 3:1 and so on. For example, if a particular investor currently holds 200 shares in company ‘X’ and they announce a bonus issue of 3:1, then in this case, he/she would get 3 bonus shares for each share they own. This means, they would get 600 shares as a bonus, thereby taking the total holding to 800 shares. Now, that's as lucrative as a windfall can ever be and all this, without really doing anything beyond buying a few shares in the firm! From a technical point-of-view, there may be multiple types of bonus shares, but any issue involving them is bound to dilute the value of each share. This is because each share represents a particular amount of the firm’s capital. Now, bonus shares may be issued from the profit accrued, but, in the end, it still represents the capital and hence, such dole-outs do run the risk of share dilution, as there are now three shares for each that existed before (going by the above example). Besides rewarding loyal shareholders firms also indulge in bonus share announcements to generate a buzz about them in the market. By leveraging what is known as the 'Halo-effect', managements do hope to benefit from the renewed interest and the impending funding infusion by retail investors. This is also used to attract the Global institutional investors that might be looking to park their funds in a firm that is of robust underpinnings and is flourishing rather well. Some companies are also known to take recourse to issuing types of bonus shares when they feel that the existing prices on the bourses have spiked up so high that they are well and truly out of reach of the common man. By issuing complimentary shares, they dilute the cost per share (as per the ratio discussed earlier) and thereby, reduce it to levels where they are affordable again. At the end of the day, investors must watch out for falling prey to market tactics. An impending bonus issue should never be the sole reason for investing into a firm. There are multiple other factors that can have a bearing on the decision and they must be evaluated thoroughly before putting down the green-bucks.
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