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Bonus issues are usually produced in a ratio determined by shares already owned by shareholders. Depending on each company’s policy, bonus issues can be limited to specific shareholders and/or to specific classes of shares.

As no cash floats between investors, this is an accounting transaction. It capitalises on retained earnings and it can represent a way to distribute earnings to shareholders.

It also produces other effects – such as share capital being brought into line with the employed assets and pulling the share price lower, to a more convenient price, thus boosting the marketability of the stock. With a lower price and higher availability on the market, the shares improve their appeal to potential new investors, while current holders will not see the value of their stock decrease.