A stock that is issued by a company, free of charge, to its existing stockholders on a prorata basis. This is usually done by companies having a great amount of accumulated reserves, in an attempt to increase their equity share capital. This is particularly the case when such reserves cannot be used to pay out cash dividends due to law restrictions or internal policies.

Bonus stock can help issuing companies provide a better return on investment. The issuance process involves the conversion of retained earnings or other reserves into the equity share capital. This doesn’t change the size of the company, nor does it affect the asset side of its statement of financial position (balance sheet).