Bonus or scrip issue

A bonus issue (or scrip issue) is a stock split in which a company issues new shares without charge in order to bring its issued capital (outstanding stock) in line with its employed capital (the increased capital available to the company after profits). This usually happens after a company has made profits, thus increasing its employed capital. Therefore, a bonus issue can be seen as an alternative to dividends. No new funds are raised with a bonus issue.

Calculating a one-for-five bonus issue

If a company that has 100,000 shares issued at £1 per share made a one-for-five bonus issue, 20,000 new shares would be issued to existing shareholders - one new share for every five shares held. Issued share capital would be increased by £20,000 and capital reserves would fall by £20,000.

Unlike a rights issue a bonus issue does not risk diluting your investment. Although the earnings per share of the stock will drop in proportion to the new issue, this is compensated by the fact that you will own more shares. Therefore the value of your investment should remain the same although the price will adjust accordingly.