BONUS ISSUE

One way for a UK firm to reduce its average share price is via a bonus issue.

Here a firm gives away free shares in a fixed ratio based on a shareholder’s existing holding. So for example a 1-for-4 bonus issue when the current price is £2.50 results in a shareholder receiving one free share for every four currently held. If you were the holder of 800 shares before the bonus issue, priced at £2.50 each your holding would be worth £2,000. A 1-for-4 bonus issue would allocate you another 200 free shares. Now your total holding is 1,000 shares worth £2,000 suggesting a new “ex-bonus” price of £2 per share.