It’s Eid at the pizza shop, and Bilal has two announcements.
First, he turns to the shareholders. “We’ve had a great year, and instead of cash, we’re thanking you with something else. For every five shares you already own, we’re giving you one more. Free. No payment needed.”
Hina, who owns ten shares, claps. She’s just been handed two more, for nothing.
A few months later, Bilal is back with a different kind of announcement. “We want to open three new branches, and we need fresh money to do it. So we’re offering existing shareholders the first chance to buy more shares, at a bit of a discount from the current market price. You’re not required to buy, but if you want in, you get priority.”
Hina thinks about it. This time, she has to actually pay for the new shares, just at a friendlier rate than a stranger off the street would get.
Same shop. Two very different offers. One was a gift. The other was an invitation to buy in, with a discount as the sweetener.
That’s the difference between bonus shares and right shares.
So what exactly are bonus shares?
Bonus shares are additional shares a company gives to its existing shareholders, completely free, in a fixed ratio to what they already hold. A common example would be a company announcing a 20% bonus, meaning for every 5 shares you own, you receive 1 extra, at no cost.
Companies usually issue bonus shares when they have accumulated profits or reserves and want to reward shareholders without paying out cash. It’s a way of converting part of the company’s reserves into more shares in investors’ hands.
Here’s an important detail though. Bonus shares don’t make you instantly richer. Since the company isn’t raising fresh money or becoming more valuable just by issuing them, the share price usually adjusts downward to reflect the extra shares now in circulation. You own more shares, but each one is typically worth a little less, so the total value of your holding stays roughly the same right after the bonus is issued.
And what are right shares?
Right shares are new shares a company offers to its existing shareholders when it wants to raise fresh money, often for expansion, paying off debt, or other business needs. Unlike bonus shares, these aren’t free. Shareholders are given the right, hence the name, to buy these new shares, usually at a price below the current market rate, and usually in proportion to what they already hold.
For example, a company might offer a “1 for 5” right share, meaning for every 5 shares you own, you have the option to buy 1 more at a discounted price.
Shareholders aren’t forced to buy. If you don’t want to, you can usually let the right lapse, or in some cases sell your entitlement to someone else. But if you do nothing and prices have been discounted for everyone who does participate, your ownership percentage in the company can get diluted slightly, since more total shares now exist and others bought in while you didn’t.
Why do companies choose one over the other?
Bonus shares are mainly a reward mechanism, a way to share accumulated profits with investors without paying cash, often used when a company wants to keep cash in the business while still giving shareholders something tangible.
Right shares are a fundraising mechanism. The company genuinely needs new money, and rather than going straight to new outside investors, it gives existing shareholders the first opportunity to put in more, usually at a friendlier price than the open market.
A quick example
Suppose you own 100 shares of Sunrise Bakery Ltd., trading at 60 rupees each. Your holding is worth 6,000 rupees.
The company announces a 20% bonus issue. You now receive 20 extra shares, for free, bringing your total to 120 shares. But the share price typically adjusts down roughly in proportion, say to around 50 rupees. Your new holding, 120 shares at 50 rupees, comes to 6,000 rupees. Same total value, just spread across more shares.
Now suppose later, Sunrise needs funds for a new factory and announces a right issue, offering a “1 for 4” right at 40 rupees per share, a discount to the current market price. With your 120 shares, you’re entitled to buy 30 new shares at that discounted rate, costing you 1,200 rupees if you choose to participate.
If you do, your total holding grows to 150 shares, and you’ve put in fresh money to get there. If you don’t participate, you keep your 120 shares, but your overall slice of the company shrinks slightly, since the total number of shares in the company has now grown.
The takeaway
Bonus shares are a free reward, more shares in your account, but not necessarily more value on day one. Right shares are an invitation to invest further, at a discount, when a company needs fresh capital. Knowing the difference helps you understand exactly what a company is offering you, and whether it calls for simply accepting, or for deciding whether to pay.
