Bonus issue

A bonus issue is common among British companies. In America the nearest equivalent is a stock split. With a bonus issue a firm gives away free shares to its existing shareholders. The objective is often to make its shares more ‘liquid’ by reducing the average price.

So say a company issues bonus shares on a one for four basis when the current share price is £2.50. You would expect the average price per share to drop to around £2 (since a shareholder had four shares worth £10 before the bonus issue and five shares worth £10 afterwards).

No new cash is raised for the issuer and since there is no requirement to pay for the new shares, existing shareholders have no yes/no decision to make – as in a rights issue. A US stock split achieves much the same as a UK bonus issue.

Merryn

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