why do companies issue bonus shares 
companies typically issue bonus shares for several key reasons first they encourage more retail investor participation in their stock by lowering the price per share and adding liquidity second they provide an alternative to issuing a dividend payment for rewarding investors and finally they reflect that the company is in a financially sound position to keep growing and generating shareholder value we will further discuss these reasons when looking at the advantages of issuing bonus shares advantages of issuing bonus sharesencouraging retail participation increasing the number of outstanding shares adds liquidity and decreases a company s stock price making its shares more affordable and easier to trade for retail investors lower priced shares allow investors to acquire more units while increased liquidity reduces slippage costs 1alternative to paying dividends companies generating irregular profits may issue bonus shares rather than cash dividends to build shareholder confidence bonus issues may be particularly appealing for smaller companies that want to attract more investors but don t have earnings consistent enough to pay regular dividends 3displaying financial health a company that issues bonus shares demonstrates that it has sufficient share reserves and or profits to reward prospective investors and current shareholders share issues also signal that a company is in a financially sound position to keep growing and adding shareholder value favorable tax treatment bonus shares aren t taxed when issued making them more favorable than a cash dividend from a taxation perspective with the latter subject to a tax rate of 10 to 37 however investors are still required to pay capital gains tax on bonus shares if selling them for a net gain 4disadvantages of issuing bonus sharesopportunity cost a company could use earnings set aside for a bonus issue for other purposes that may add more shareholder value for example retained earnings could be used for a strategic acquisition into a new growth market or to fund updated equipment and machinery lost opportunities also have the potential to create bad press for a company which may negatively impact investor sentiment 3negative impact on dividends issuing bonus shares does not generate cash for the company which could result in a decline in future dividend payments potentially upsetting shareholders additionally some investors who receive bonus shares may think that the company may prioritize that form of reward over a cash dividend in the future no immediate financial benefit unlike a cash dividend payment shareholders don t immediately benefit financially because the company s stock price drops proportionally to the additional bonus shares issued for example assume an investor buys 100 shares of xzy ltd stock for 10 each and the company has a one for one bonus issue after the bonus issue the investor now holds 200 shares 100 original shares 100 bonus shares as a result of the additional bonus shares added to the outstanding supply they are now worth 5 each 10 2 not providing the investor with any immediate financial gain stock splits vs bonus sharesstock splits and bonus shares have many similarities and differences when a company declares a stock split the number of shares increases but the investment value remains the same companies typically declare a stock split as a method of infusing additional liquidity into shares increasing the number of shares trading and making shares more affordable to retail investors 