Bonus Issue vs Right Issue

What is the difference between bonus issue and right issue? A bonus issue (also called a capitalisation issue or a script issue) is an issue of ordinary shares to existing shareholders at no charge.

For bonus issue, new shares are issued by transferring company's reserves into share capital. The number of free shares is usually distributed pro rata to existing stockholder. For example, if a company declares a one for three bonus issue, it means that for every 3 shares held, a shareholder will receive one free share.

A rights issue is an issue of new shares to existing shareholders at a price that is lower than the market price listed in the stick exchange, and therefore making it attractive to the existing shareholders.

For instance:
ABC Ltd has 500,000 $1 ordinary shares as at 31 December 2010. The company makes a rights issue to its existing shareholders by offering 1 new share for every five existing shares held. The new shares are issued at $1.50 each.

So, the rights issue is 1 for 5,
and with 500,000 shares, the rights issue =100,000 shares.
The amount received from the issue = 100,000 shares x $1.50 = $150,000.

* Next: Examples of Stock Splits