Bonus shares are additional shares issued by a company to its existing shareholders at no extra cost. These shares are distributed in a specific ratio, such as 1:2 (one bonus share for every two shares held), based on the investor’s current holdings.

Companies issue bonus shares as a way to reward shareholders while conserving cash. Instead of paying dividends, they capitalize on their retained earnings or reserves to issue new shares. This increases the total number of shares outstanding but does not change the company’s overall market capitalization.

The issuance of bonus shares benefits shareholders by increasing their total shareholding without requiring additional investment. While the stock price typically adjusts downward in proportion to the bonus issue, the investor’s total portfolio value remains the same initially. Over time, if the company performs well, the increased liquidity from bonus shares can enhance market participation and potentially lead to price appreciation.

Bonus shares also improve a company’s perceived value, making the stock more affordable for new investors. They are especially common in companies with strong reserves but limited cash flow for dividend payouts. However, issuing bonus shares does not directly impact a company's profitability, as it is merely a redistribution of equity.