Basic Facts about Bonus Shares:

Investing in stock market has two main objectives : Growing your capital and regular income in form of dividend. Growing capital may happen by simple appreciation of share price or by a combination of share price growth and addition of free shares in the form of bonus.

Though many investors get lured by 'FREE' shares, post bonus the share price falls. For instance if the share price is Rs.100 and the company issued 1:1 bonus, then post bonus the number of sharesee increases to 200 and the share price falls to Rs.50. Thus making the total value of investment the same.

Once investors realize this, they feel there is no meaning in investing for the sake of bonus. They feel it makes no economic sense. This could be due to misconception of facts behind Bonus.

Bonus is:

• Non cash transaction. 
• It is issued for free to existing share holders in a ratio like 1:1 or 1:2 etc
• Post bonus, the number of shares increases - thus increasing the liquidity.
• Increase in liquidity coupled with lower share price - makes it affordable for more number of investors to buy these shares. Thus increasing the share holder base.
• More number of share holders results in more public scrutiny and improved price discovery.
• Inspite of any number of bonus shares, the face value of the shares remain constant. Unless the shares are split (when face value of the shares are split), the face value remains constant.
• And if the company maintains constant dividend or improved dividend in percentage terms, then the share holder stands to gain immensely. And the dividend yield ratio increases since the same percentage dividend on reduced share price (post bonus) makes it even more attractive.

But all these factors work only in the long term - atleast in 3 to 5 year term and beyond. Short term investors need to be satisfied with the short term surge in stock price due to bonus announcements.