Unveiling the Mystery: What’s in a Free Share?
Imagine waking up one fine Tuesday morning, relishing your coffee, and then bang! You suddenly realize you’ve got free shares. Yes, free – nada, zilch, zero costs involved! That’s the magical, mystical wonder of free shares under a rights issue. Let’s unravel this fantastic phenomenon.
🪄 Definition for Muggles
So, what exactly are free shares? In accounting terms, these are shares bestowed upon the lucky shareholders without any moolah in exchange – not a penny, nickel, or dime. It often happens as part of a rights issue, sort of like an Oprah episode: *
### What are *free shares*?
- [x] Shares issued without any payment
- [ ] Shares purchased at a premium
- [ ] Shares obtained through a stock exchange
- [ ] Non-existent shares
> **Explanation:** *Free shares* are shares issued without the need for payment, typically part of a rights issue.
### In finance, what is a 'rights issue'?
- [ ] A litigation involving shareholder rights
- [x] A method where a company offers shares to existing shareholders
- [ ] Shares given exclusively to board members
- [ ] A magazine on shareholder rights
> **Explanation:** A 'rights issue' is a way a company gives more shares to existing shareholders, often for free or at a discount.
### What is the primary benefit of free shares in a rights issue?
- [x] They come at no additional cost
- [ ] They come with voting rights
- [ ] They can be exchanged for gold
- [ ] They have no benefits
> **Explanation:** The main allure of free shares in a rights issue is that they cost nothing to the shareholder.
### Who typically receives the free shares?
- [ ] Anyone in the market
- [ ] Only new investors
- [x] Existing shareholders
- [ ] Board members only
> **Explanation:** Free shares under a rights issue are typically allocated to existing shareholders.
### Why might a company issue free shares?
- [ ] As a promotional giveaway
- [x] To reward loyalty and keep investors engaged
- [ ] To offload losses
- [ ] They never issue free shares
> **Explanation:** Companies often issue free shares to existing shareholders as a strategy to reward loyalty and boost investor engagement.
### How do free shares affect the shareholder's wealth directly?
- [ ] They instantly enrich shareholders
- [ ] They reduce shareholder wealth
- [ ] They have no immediate financial effect
- [x] They increase paper wealth
> **Explanation:** Free shares generally increase a shareholder's paper (accounted) wealth rather than instantly making them liquid-rich.
### Free shares are usually issued during:
- [ ] Valentine's day
- [x] A rights issue
- [ ] Company liquidation
- [ ] IPO of a company
> **Explanation:** Free shares are most often a feature of a rights issue.
### What is likely a shareholder's reaction to receiving free shares?
- [ ] Displeased
- [ ] Apathetic
- [x] Surprised and grateful
- [ ] Wanting to sell immediately
> **Explanation:** *Free shares* often leave shareholders surprised and thankful as these shares cost nothing extra.
