A Bonus Share is also known as Scrip Issue or Capitalisation Issue. Existing shareholders of the company gets free additional shares at no cost in direct proportion to the existing shares that they hold.
For example, if there is a Bonus Offer of 1 for 10, it means that the existing shareholders will receive 1 new share, for every 10 existing shares that they have.
Bonus Share issue will result in an increase of outstanding shares in the market. However, it does not cause any dilution in the shareholders' ownership in the company.
The bonus shares are accorded from the company's share price premium or retained earnings. Retained earnings are the net profits accumulated over the years and are not paid out in dividends to shareholders.
The conversion of retained earnings to paid-up share capital (Bonus Shares) is known as capitalisation of reserves. During the capitalisation of reserves, there will be corresponding increase in shareholders' equity and decrease in retained earnings.
Share Consolidation is also known as "Reverse Stock Split". It is a corporate action to decrease the total number of outstanding shares and increase the nominal or par value of each share.
After the corporate action, the shareholder will own fewer but theoretically higher priced shares due to the decrease in the total outstanding shares in the market.
There will be no impact on the value of the shareholder's holdings relative to the total market valuation of the company.
Right issue is a mean for companies to raise funds by issuing new ordinary shares. Companies can issue other securities such as preferential shares, bonds and warrants instead of new ordinary shares. The company can ask the existing shareholders for capital for the following reasons:
- To fund acquisition or expansion plans.
- To repay maturing debts as an alternative. The company may be unable to secure more borrowings.
Existing shareholders are given the opportunity to maintain their stake in the company to prevent dilution. When there is a right issue and the existing shareholder chooses not to subscribe for the new shares, the shareholder's stake in the company is diluted, as the new shares are added to the total shares outstanding in the market.
What are Corporate Actions?
Corporate Actions are events implemented by a company. These actions have to be approved by the company's board of directors, and shareholders are empowered to vote on specified proposed corporate actions.
Corporate actions affect preferred shareholders, common shareholders and bondholders.
Shareholders are required to respond to certain corporate actions such as dividends, right issues and merger and acquisitions cash offers.
As a remisier for many years, I realised that investors and traders who are starting out tend to ask a similar set of questions. The topic on deciphering corporate actions has popped up multiple times, and I have decided to compile the information to educate the folks out there. You're welcome.
Deciphering Corporate Actions
I have decided to value-add by posting whenever I feel there is an upcoming trend change in the major markets.
This is in comparison to doing up a "monthly" update, where there can be no significant movement in a month, or having a highly volatile environment where I will be doing up more posts to keep you guys updated.
Please note that I will be showing some of my live trades that I have done with the community, using the $10k challenge I have setup 2nd quarter of 2016.
This is to show that you can be consistent and be rewarded even with a small capital, as long as you take action with a systematic trading strategy.