Bonus Issues

Ø     Increases the number of shares on the market and reduces the share price of the stock

Ø     This improves the liquidity of the stock and shareholders will end up with more shares although they will still have the same value.

Ø     It is important to bear in mind the “nothing for nothing’ rule.

Ø     Bonus issues are also known as Scrip Issues as they are Non-Voluntary i.e. the shareholders do not have a choice.

Ø     A Bonus issue is known as a Stock Split in America, not to be confused with an actual Stock Split

Ø     It is possible to receive different stock from a Bonus Issue than the shares originally held e.g.

§       Bonus Issue of Warrants.

§       Bonus Issue where shares in a different company are received, this is called a spin-off.

Ø      Shares may not rank pari passu immediately.

Example

§        Company J Bloggs  Ord 25p has a 1 for 3 Bonus Issue on 1 December 2002.

§        Portfolio X holds 3000 of these shares with a book cost of £1200.00. 

§        The price on the 30 November 2002 £1.00

On XD date (1 December 2002) the following will occur:

§        The price will become £0.75

§        The number of shares held in portfolio X will become 4000

§        The book cost will remain the same.

Effect on Valuation

The overall effect on the valuation on EX date will be to increase the number of shares from 3000 to 4000 and reduce the price from £1.00 to £0.75p. Therefore there will be no effect on the value of the fund.

For details of how to process see Icon Processing note.