Stock Splits, Rights Issues and Bonus Shares

Why these events matter

Companies sometimes change the number of shares they have in issue. Some changes cost the shareholder nothing. Others ask the shareholder to pay money or accept dilution. If you hold shares listed on the Pakistan Stock Exchange (PSX), you need to know which kind of event you are looking at. If you are new to shares, start with What Stocks Are and PSX basics.

All three events change the share count and the price per share. Only a rights issue brings new money into the company.

Stock split

A stock split divides each existing share into several smaller shares. The company's total value does not change, so the price per share falls in the same proportion as the share count rises.

• Your number of shares goes up.
• The market price per share goes down by the same factor.
• The value of your holding stays the same at the moment of the split.

A reverse split does the opposite. Shares are combined, so you hold fewer shares at a higher price per share.

Companies often split shares when the price per share looks high and they want to make trading lots more affordable. A split does not make the company more valuable. Per-share figures such as earnings per share and dividend per share are restated, so compare them only after adjusting. See Valuation Ratios.

Bonus shares in Pakistan

Bonus shares are new shares given free to existing shareholders in proportion to what they already hold. The company moves part of its reserves into share capital. No cash comes in and no cash goes out. This is why bonus shares are also called a capitalisation issue.

In economic terms, a bonus issue works like a split. You get more shares, and the price adjusts down on the ex-bonus date, so your total value is unchanged at that moment. In Pakistan, companies often announce bonus shares together with their results or a cash dividend. Bonus shares are not income in the way a cash dividend is. See Dividends for that comparison.

Tax treatment of bonus shares and of any sale can change. Check the current rules with the tax authority or your broker. Our page Payments, tax, Islamic banking gives the wider picture.

Rights issue: right shares meaning

A rights issue is an offer of new shares to existing shareholders, in proportion to their holdings, at a fixed subscription price. This price is usually below the market price. The new shares are called right shares. The company raises fresh capital this way, which is different from selling shares to new investors in an IPO.

Key terms:

• Entitlement ratio: how many new shares (n) you may buy for every block of shares (N) you hold.
• Subscription price (S): what you pay per new share.
• Cum-rights price (P): the market price before the shares go ex-rights.
• Ex-rights date: from this date, a buyer of the shares no longer gets the right. The price usually adjusts on this date.
• Letter of right: the document that represents your entitlement. In many markets it can be traded for a limited period before subscription closes.

The company's official announcement on PSX gives the actual ratio, price and dates. Always read it.

Theoretical ex-rights price (TERP)

After a rights issue, the old and new shares trade as the same share. Their theoretical price is a weighted average of the old price and the subscription price:

TERP = (N×P + n×S) / (N+n)

• N = shares needed to receive the entitlement
• P = cum-rights market price
• n = new shares offered for those N shares
• S = subscription price

The value of a right can be expressed per new share as TERP − S. It can also be expressed per existing share as P − TERP. Market prices can move away from TERP because of demand, news and the use the company makes of the money.

Enter your own figures in the calculator below:

More tools are on the Calculators page.

Your choices in a rights issue

Letting rights lapse is usually the costly option. The share price adjusts down towards TERP, but you receive no compensation. Some issues pass unsubscribed shares to underwriters, and the terms of this vary from company to company.

A rights issue does not guarantee anything about the future price. The share can fall below TERP or even below the subscription price. Think about your risk tolerance and diversification before you put more money into the same company.

Charts and adjusted prices

Splits, bonus issues and rights issues create price gaps on charts that do not reflect a real market move. Many data providers show "adjusted" price history, where past prices are scaled to remove these gaps. Before you apply technical analysis, check whether your chart is adjusted.

Where to trade and check brokers

The Securities and Exchange Commission of Pakistan (SECP), with trading in listed securities and commodities only via SECP-licensed securities and futures brokers. On broker lists, per the SECP, lists of licensed brokers are on the PSX and PMEX websites. Read more on Law and regulators.

Frequent questions

Does a stock split make me richer?

No. You hold more shares, but each share is worth proportionally less. Your total value is the same at the moment of the split.

Are bonus shares the same as a dividend?

No. A cash dividend pays money out. Bonus shares only divide the same company into more shares, and the price adjusts down to match.

What does right shares mean?

Right shares are new shares that existing shareholders may buy at the subscription price, in proportion to their current holding.

Why is TERP lower than the old price?

New shares are sold below market price. TERP averages the old and new shares, so it sits between P and S.

What happens if I ignore a rights issue?

Your rights lapse. Your holding is diluted, and you receive nothing for the right you did not use or sell.

Where do I find the ratio and dates?

In the company's official announcement on PSX and through your SECP-licensed broker.