OpenMarkets Education

Rights, bonuses and splits

Rights issue

Companies can raise further capital through a rights issue, in which it offers an issue of shares to existing shareholders at a discounted price. The offer is usually made in proportion to the investor’s existing shareholding.

Example: one new share offered for every five shares owned.

If a rights issue is renounceable, it means it can traded on a designated exchange for a specific period.

Bonus issue

A free issue of shares to shareholders, generally in proportion to the existing shareholding. Although it sounds good, what you really have is more shares worth the same value as the previous shareholding. This sometimes sees a company revalued downwards by the market.

Why do companies do this? Theories include:
> A company may seek to lower its share price to make it more attractive to investors and traders
> A company can use a bonus issue in lieu of increasing dividends
> By increasing issued share capital, a company might become more attractive.

Splits

Again, a situation where a shareholder ends up with more shares, but the total value of the shareholding remains the same.

Example: a four for one split of a $10 share would result in four $2.50 shares in place of each $10 share.

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