Free lunch? Not quite...
In the latest in our series on understanding the stock markets, John Andrew explains the rationale behind scrip issues, in which a company will offer its investors `free' extra shares
Wednesday 05 February 1997
Founder shareholders in some of the Government's privatisation issues received free "loyalty shares" and, of course, members of building societies such as the Halifax which have decided to adopt public limited company status will receive free shares.
However, the "free" shares generally encountered by shareholders normally leave them no better off. In City jargon these are known as scrip issues. Technically they are a capitalisation of reserves. This sounds complicated, but it is very straightforward.
Suppose a company begins life with the issue of one million shares at pounds 1 each. The proceeds will raise pounds 1m, which we will assume is used to buy assets for the business. Let us now put the clock forward a few years.
Assume over that period the company has done well and while the shareholders received dividends, the company also ploughed back pounds 9m of profits into the business. The accounts still show share capital of pounds 1m and reserves of pounds 9m.
This is a simplification, but suppose the company's shares are now priced pounds 10 (the shareholders' funds are pounds 1m + pounds 9m = pounds 10m; pounds l0m divided by pounds 1m = pounds 10 per share).
Let us suppose the directors announce a scrip issue and every shareholder will receive one extra share for every one they own. In City parlance this is called a 1-for-1 scrip issue. Each shareholder's holding in the firm will double. The company is still worth pounds 10m, but the number of shares has increased from one million to two million. Each share is now worth pounds 5 (pounds 10m divided by two million shares).
So why does a company have a scrip issue? The popular explanation is that the shares are considered "expensive". In other words, pounds 10 a share may be a barrier for new investors, whereas they will buy at pounds 5.
This defies logic, but, if you look at the price of shares quoted on the London Stock Exchange, you will notice that prices are generally under 1,000 pence.
As Stuart Valentine, Director of Proshare, the organisation to promote share ownership, says: "A scrip issue just proves the old adage that there's no such thing as a free lunch - or a free anything else for that matter."
So what does an investor have to do when a company announces a scrip issue? The answer is usually "nothing". Shareholders will receive notification of the scrip issue from the company. This includes a timetable for the procedure. One of the pertinent pieces of information will be the "records date".
All those on the shareholder's register at that time will be entitled to the scrip issue. Five to ten days afterwards, the shares will be quoted "ex scrip" on the market. This means the share price has been adjusted for the issue. The letters "xc", where "c" stands for "capitalisation", will appear after the price of the shares quoted in the press.
As soon as the new certificates are ready, they will be mailed to shareholders. Those wishing to sell their entire holding before their new certificate arrives may do so, for stockbrokers will be aware of the situation. However, it must be made clear when the sale instructions are given that you wish to sell "old" shares which are equivalent to a certain number of "new" shares.
When the new certificate arrives, it must be forwarded to the broker who dealt with the sale.
Your broker will always be pleased to answer any questions that you have and to give guidance
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
How couples can protect their financial interests when cohabiting
Authorities failing in hunt for 'most wanted' tax dodgers who owe HMRC £844m
Buyers beware of new-build home headaches
Dirty tricks in a divorce can cause some nasty surprises
A student's guide to financial survival: You don't have to drown in debt at university
- 1 Notting Hill Carnival: Woman shares selfie after being ‘punched in face for telling man to stop groping her’
- 2 Joan Rivers: 'Palestinians deserve to be dead'
- 3 Daily Show's Jon Stewart destroys Fox News for its Ferguson coverage
- 4 ALS ice bucket challenge co-founder Corey Griffin drowns, aged 27
- 5 Botched ice bucket challenge leaves man critically injured after plane drops hundreds of gallons of water
Exclusive: We share blame for creating 'jihad generation', says Muslim strategist
Robin Williams Emmys tribute led by Billy Crystal criticised for including 'racist' joke about Muslim woman
The Rotherham child abuse scandal is a tale of apologists, misogyny and double standards
Scottish independence TV debate: Pumped-up Alex Salmond bounces back in bruising second round against Alistair Darling
Do you realise just how foolish the UK looks?
Ukip Douglas Carswell defection: Tory MP jumps ship to join Nigel Farage
- < Previous
- Next >
iJobs Money & Business
£20000 - £30000 per annum + OTE £40-50K first year: SThree: The SThree group i...
£300 - £350 per day + competitive: Orgtel: Cost Reporting Manager - MI Packs -...
£85000 - £100000 per annum: Ashdown Group: Head of Marketing - Slough, Berkshi...
£35000 - £55000 per annum: Harrington Starr: A Global global asset management ...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony