[Beginner's Guide] Stock Soars with 'Bonus Issue'... Does Bonus Issue = Stock Price Surge?

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[Asia Economy Reporter Kwon Jae-hee] You may have heard the term "free capital increase." Unlike a paid capital increase, a free capital increase refers to distributing shares free of charge. However, whenever news of a free capital increase is announced, phrases like stock price surge and limit-up always follow. Let's find out why a free capital increase acts as a positive factor for stock prices and whether it is always beneficial.

What is the difference between a free capital increase and a paid capital increase?

"Capital increase" is one method of raising funds. A paid capital increase involves issuing new shares to existing shareholders, third parties, or general investors at a price lower than the current trading price, which puts pressure on the stock price. The increased supply of lower-priced shares damages shareholder value.

A free capital increase also increases the number of shares, so it might seem similar. However, a free capital increase means distributing shares "free of charge." Companies often conduct 100% free capital increases, which doubles the number of shares held. For example, if you hold 1,000 shares, after a 100% free capital increase, you will have 2,000 shares.

Is the increase in shares from a free capital increase always good?

Since the number of shares held doubles, it naturally seems beneficial for existing shareholders. Even if the stock price does not move, you can earn twice as much. But is it always good? While the number of shares doubles, the stock price is discounted by 50%.

For example, if a company with a current price of 10,000 KRW conducts a 100% free capital increase, the stock price is forcibly adjusted to 5,000 KRW. This forced price adjustment is called "ex-rights." Although the number of shares doubles, the stock price is halved, so the market capitalization (number of shares issued x stock price) remains unchanged. In other words, the corporate value stays the same.

If the stock price is discounted by a free capital increase, why does the stock price surge?

You might wonder how the stock price can surge when the corporate value remains the same. The answer lies in the reason companies conduct free capital increases. The main reason is to increase trading volume. When trading volume is insufficient, investors face restrictions in trading. No matter how good a company is, if trading is difficult, investor interest tends to decline. By increasing the number of shares and lowering the stock price, a free capital increase makes it easier for investors to access the stock, thereby activating trading.

Are there other effects of a free capital increase?

Besides stock price increases and active trading, a free capital increase also has a "publicity" effect. Since free capital increases use surplus funds generated from profits, companies with poor financial structures find it difficult to conduct them. Therefore, a free capital increase is proof of a solid financial structure and indirectly serves as a way to promote the company as a good business.

Free capital increase = stock price surge = good company? What should investors be cautious about?

As mentioned earlier, free capital increases are associated with stock price surges and the perception of a financially sound company. However, recently, more companies that are operating at a loss have been announcing free capital increases, requiring special caution. Some companies use optical illusions to carry out free capital increases. A company's equity capital is divided into capital stock and surplus funds, and issuing shares by transferring surplus funds to capital stock is one such method. This is interpreted as the company having accumulated surplus funds internally, making its financial structure appear healthy to investors. However, some companies struggling with losses for years also conduct free capital increases. They issue new shares by transferring share premium (included in surplus funds) generated from previous share issuances to the capital stock account.

By when must you be listed on the shareholder registry to receive a free capital increase?

The public disclosure will state the record date for new share allocation. When a stock trade is executed, settlement occurs three business days later, including the transaction day. For example, if the record date is Monday, May 13, you must purchase the stock by Thursday, May 9 at the latest to be listed on the shareholder registry on the 13th. Only then can you secure the right to receive new shares free of charge.

This content was produced with the assistance of AI translation services.