For an investor in equity nothing pleases him more than when a company declares bonus shares to the existing shareholders of the company. It is free bonanza for the equity shareholders. The immediate reaction of the market is one of excitement and for all the right reasons. Such declarations indicate that the company declaring a generous bonus in the form of free shares is in the pink of financial health fuelling prospects for further growth.. Our experience shows that such events in the life of a company are rare and there are not too many companies in India which reward its shareholders with bonus shares. As it is a win-win situation from the shareholder's perspective the companies too derive tremendous gains out of such bonus decisions. Although their gains are not in purely financial terms. The overall image of the company gets a big boost in the minds of all the stakeholders viz., the shareholders, creditors, bankers, financial institutions and the general public.

As has been explained the bonus shares are meant for the existing equity shareholders of the company. But you too can participate in this gala event and make some profits by investing in a bonus candidate. It is very common to witness some volatility in the price of a bonus candidate especially in the pre-bonus and post-bonus stages. This cycle starts with the declaration of bonus and with its price zooming abnormally and adding to the pleasure of the existing shareholder. But if you step in and buy the share cum-bonus on the very day you may not end driving a good bargain. It makes greater sense to go for it once the initial euphoria is over and the price stabilises. It is very important to keep an eye on the record date on which bonus entitlements are decided. If you are fortunate enough to pick it up at a fairly cheap price and to see its price substantially picking up before the record date. It would be worth selling it at a profit and pay short-term capital gains tax. Alternatively if you are otherwise convinced of the growth story of the company, hold on to your purchase for a long term and book profit according to your convenience tax free.