A corporate action where a company distributes additional shares to its existing shareholders without any additional cost is under examination. These are allocated based on the number of shares a shareholder already owns, effectively increasing the total number of shares in circulation. A hypothetical scenario involves an investor holding 100 shares prior to the distribution. Following the allocation, this investor might possess 200 shares, assuming a 1:1 ratio.
Such allocations serve several key functions. They can signal management’s confidence in the company’s future prospects, as it suggests they believe the business can sustain the increased share base. This action can also enhance the stock’s liquidity, making it easier to buy and sell due to a greater number of shares available in the market. Historically, this practice has been used to reward shareholders and potentially make the share price more accessible to a wider range of investors by reducing the price per share.
