Shares issued free of charge to existing shareholders based on their previous holdings is __ issue
Answer Details
The shares given free of charge to existing shareholders based on their previous holdings are referred to as a bonus issue.
A bonus issue, also known as a scrip issue or capitalization issue, is when a company decides to reward its existing shareholders by issuing them additional shares. This is done in proportion to their current shareholding without any additional cost. For example, a company might issue one bonus share for every ten shares held.
The main reasons for a bonus issue include:
Rewarding Shareholders: It is a way to reward shareholders for their loyalty without paying out cash dividends.
Increasing Liquidity: With more shares available, trading in the shares becomes more liquid.
Signalling Confidence: It often signals that the company is confident about its future profits.
Adjusting Share Prices: The increase in the number of shares can help lower the individual share price, making them more affordable and attractive to investors.
It is important to note that while a bonus issue increases the number of shares outstanding, it does not change the overall market capitalization of the company, as the value of each share is adjusted accordingly.