What are bonus shares?
Instead of paying cash, the company moves part of its retained earnings or reserves into share capital and issues new shares to holders in proportion, say one bonus share for every four held. No new money enters the company and none leaves it. The same company is simply divided into more shares.
Before and after, in numbers
After that the market is free: the price can rise or fall like any other day. But the starting point is the adjusted price, not the old one.
Your average cost changes
If you bought the 400 shares at 18, you paid 7,200. The same 7,200 now covers 500 shares, so your average cost is 14.40. Compare the new price with your old cost and you will think you are losing when you are not. In FoudaLens the portfolio adds the shares for you, and the chart is adjusted so that day does not look like a crash.
See a real bonus issue
Open corporate actions and find a bonus issue. Work it out: with 1,000 shares, how many would you receive, and what is the logical price afterwards?
Check yourself
1. You hold 600 shares and get one bonus share for every 3. How many will you hold?
2. After a bonus issue, what does the logical value of your holding do?
Summary
- Bonus shares divide the same company into more shares, with no new money.
- Your count rises and the theoretical price adjusts down so the value stays about the same: for example 25% more shares against a 20% lower price.
- Your average cost falls, so compare the new price with the new cost.