Corporate actions, such as bonus shares and stock splits, often generate
significant excitement in the stock market. Many traders, even those with lots of experience, sometimes make the mistake of buying shares just before an important date, hoping to make quick money. However, the truth is that a stock’s price doesn’t automatically go up just because of a bonus or split—it actually rises because of a temporary rush of interest from traders who might not fully understand what’s happening.
For example, when a company announces a 1:1 bonus (which means you get one free share for every share you already own), the number of shares available doubles. But the overall value of the company doesn’t change; it stays the same. As a result, the stock price will go down to reflect this increase in the number of shares. Despite this, many retail traders jump in, thinking the stock will go up just because of the bonus. In reality, the price may rise for a short time due to all the excitement, but soon after, it adjusts back down, and those who buy in late often end up losing money.
Seasoned investors know that bonus shares and splits don’t create real value—they simply restructure existing equity. If you’re a long-term investor, these corporate actions shouldn’t influence your decision to hold a stock. But traders who chase these events often get trapped in a false rally, only to see their profits vanish after the record date.
So why does this happen? Because most traders don’t understand how bonus shares and splits affect Earnings Per Share (EPS), market capitalization, and liquidity. Let’s break it down in simple terms.
How Bonus Shares & Stock Splits Work: Impact on EPS & Share Price ?
What Is A Bonus Issue?
A bonus issue is when a company rewards its shareholders with free additional shares, usually from its reserves (retained profits). For example, in a 1:1 bonus, if you hold 100 shares, you get 100 more—totaling 200 shares.
Recent Example:
In 2023, Tata Motors announced a 1:1 bonus issue. Before the bonus, if the stock was trading at ₹600, post-bonus, the price adjusted to around ₹300 (since the number of shares doubled). The total investment value remained the same, but many traders who bought before the record date saw a sharp drop afterward.
What is a Stock Split?
A stock split increases the number of shares by dividing existing ones. For example, in a 1:5 split, one ₹1,000 share becomes five ₹200 shares. Unlike a bonus, no reserves are used—it’s just slicing the same pie into smaller pieces.
Example:
In 2022, Reliance Industries executed a 1:1 stock split, making shares more affordable for retail investors. The price was adjusted proportionally, but the company’s market cap stayed the same.
Impact on EPS
EPS is a company’s profit divided by its outstanding shares. Higher EPS usually means better profitability.
Bonus shares and splits dilute Earnings Per Share (EPS), which is a key measure of profitability. When a company issues bonus shares, its profits are now spread across more shares, reducing EPS proportionally. For instance, if a company with 1 crore shares and ₹100 crore in profit (EPS of ₹100) issues a 1:1 bonus, the outstanding shares double to 2 crore, cutting EPS to ₹50. The same logic applies to stock splits—more shares mean lower EPS unless profits grow.
Why Do Traders Still Fall For This Trap?
Misunderstanding Price Adjustment – Many believe the stock will keep rising post-bonus, ignoring the automatic price correction.
Herd Mentality – When others buy, FOMO (Fear of Missing Out) kicks in, driving short-term demand.
Lack of Liquidity Awareness – Bonus shares increase liquidity, but that doesn’t mean higher value.
Should You Buy Before Bonus/Split
The point I want to drive in this article is straightforward: If you are a trader, it’s advisable to ignore bonuses and stock splits, as they can be risky. Instead, focus on your technical setup. On the other hand, if you’re an investor, you understand that fundamentals are paramount above all else. If you think about it a little harder, bonus shares and splits are neutral events—they don’t make you richer or poorer. The real wealth comes from business growth, not corporate actions. Next time you see a bonus announcement, ask yourself: Is this stock fundamentally strong, or am I just chasing a myth?
If you enjoyed this breakdown, share it with a fellow investor! Most traders lose money on bonuses—don’t be one of them.
