Business, Legal & Accounting Glossary
A bonus issue is also described as a free issue, a scrip issue, a capitalisation issue and a stock dividend. These are new shares issued by a company to its existing shareholders, usually in a mathematical proportion to the number of shares already held. These shares are issued free of charge as an accounting exercise by the company.
What the company is doing is turning part of the profits and reserves it will have accumulated into capital. The company may also be undertaking the exercise to reduce the unit price of its shares in the market to make them more easily tradeable.
Dividends per share will fall in proportion to the number of bonus shares issued. The term free issue, which is sometimes used to describe bonus shares, is in fact misleading. Although the number of shares a shareholder has may have increased, the price of each share will have decreased, leaving the value of the holding unchanged.
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This glossary post was last updated: 15th February, 2020