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Bonus Issue

Trading Term

A bonus issue (also known as a scrip issue or capitalization issue) is a corporate action where a company issues additional shares to existing shareholders at no cost, typically based on the number of shares they already own. Instead of paying dividends in cash, the company distributes free shares, which are often funded by capitalizing part of the company’s reserves or retained earnings. For example, a company may offer a 1-for-5 bonus issue, meaning shareholders receive one new share for every five shares they already own.

  • No Cash Outlay for Shareholders: Unlike a stock buyback or cash dividend, shareholders do not have to pay for the new shares issued through a bonus issue.
  • Increase in Shares Outstanding: Although shareholders receive more shares, the total value of their holdings remains unchanged because the stock price usually adjusts to reflect the increase in the number of shares in circulation.
  • Capitalizing Reserves: Companies typically use retained earnings or other reserves to fund the bonus issue, which redistributes the equity within the company without changing the overall financial structure.

A bonus issue is often used to reward existing shareholders, make shares more affordable if the stock price has risen significantly, or improve liquidity by increasing the number of shares in circulation. While a bonus issue doesn’t directly increase the value of a shareholder’s investment, it can signal that the company is financially healthy and has adequate reserves.

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