Search for an answer or browse help topics to create a ticket
View all categories

Why has my average price reduced after receiving bonus shares in Zerodha?

The average price or the buy average price of your stock reduces after the credit of bonus shares to your account because the bonus shares are credited to you at no cost and the holding average is a weighted average calculated based on the First In First Out (FIFO) method.

Since the bonus shares are free shares, the buy price is considered as zero, and therefore when these bonus shares at 0 hit your Demat account, the buy average changes.

Let’s understand this with a detailed example.

Buy average before the bonus issue -

Date Symbol Trade Type Quantity (A) Price (B) Value (A*B)
01/02/2021 XYZ Buy 1 2975 2975
02/02/2021 XYZ Buy 1 2970 2970
03/02/2021 XYZ Buy 1 2945 2945
Total

3
8890

Here, the investor has bought the shares of XYZ Limited on 3 different days at 3 different prices. Buy average for these stocks are calculated as -

Total Value / Total quantity

=8890/3

= 2963.33

The buy average price of the share is Rs.2963.33/-.

Bonus issue

Now, assume on 10th Feb 2021 XYZ the company issues a bonus, in the ratio of 3:1, i.e. 3 shares for every 1 share held. The investor will be eligible to receive 9 bonus shares on 10th Feb since the investor already has 3 shares in the Demat. Therefore, the buy average changes to -

Date Symbol Trade Type Quantity (A) Price (B) Value (A*B)
01/02/2021 XYZ Buy 1 2975 2975
02/02/2021 XYZ Buy 1 2970 2970
03/02/2021 XYZ Buy 1 2945 2945
10/02/2021 XYZ Bonus 9 0 0
Total

12
8890

Hence, the new buy average post bonus issue works out to -

= 8890/12

= 740.833

Notice, how the buy average dropped post the bonus issue.

Sell transaction

Now, assume on 1st April 2021, you decide to sell 2 shares. Here is where the FIFO bit comes into play. As per FIFO, the two shares that were bought first, will be considered sold. Hence, the shares bought on 1st and 2nd Feb at 2975 and 2970 respectively will be considered as sold.

The remaining shares will be considered for the new buy average. The calculation is as follows -

Date Symbol Trade Type Quantity (A) Price (B) Value (A*B)
03/02/2021 XYZ Buy 1 2945 2945
10/02/2021 XYZ Bonus 9 0 0
Total

10
2945

Buy average = Total buy/ Total Quantity

=2945/10

= 294.50

As you can see, FIFO has an impact and reduces the investor’s buy average further. Now assume, at a later date the investor sells another share, which means the share bought on 3rd Feb 2021 will get knocked off the basis of FIFO, this leaves behind just the 9 shares received via bonus, so the buy average for these shares are -

Date Symbol Trade Type Quantity (A) Price (B) Value (A*B)
10/02/2021 XYZ Bonus 9 0 0
Total

9
0

= 0/9

= 0

Hence, the buy average will go down to 0.

So from the above examples, you can understand how the buy average can reduce or even become zero after the issuance of bonus shares when you sell your shares.

Sometimes the bonus shares are not shown in the holdings even though the price of the stock has reduced. To know more about this, click here .