Scrip Meaning In Stock Market: Before we get into this article, let’s imagine a hypothetical scenario. You are going to your local supermarket and shopping for groceries.
At the checkout counter, instead of paying with cash or a card, you use the supermarket’s custom card that gives you certain perks like cashback and reward points.
Now that card is an alternative to the universally accepted form of payment – i.e. cash, card or UPI. Between you and the supermarket, it can act as a form of credit, and the card is an acknowledgement of the debt you have with the store.
Today we are going to cover the concept of scrip, which works on the same concept. By the end of this blog, you will be able to understand –
- Types of Scrip
- Scrip meaning in stock market
- Scrip Issue Or Bonus Issue
- Pros and Cons Of Scrip
Types Of Scrip
The use of scrip is not a new concept. It is traced back to the 20th century during the Industrial Revolution when employers at truck companies would pay their workers with a private currency that could only be used within that company.
By doing so, the employer would gain all the benefits. All the wage workers would be completely dependent on their employer for their living expenses such as food and rent.
For obvious reasons, this form of payment was soon banned and the use of scrip for wages was history. But we still see their use today in other forms.
Some well-known examples of scrip in today’s world are –
- Reward Points
- Flyer Miles
- Gift Cards
- Token Coins
Scrip Meaning In Stock Market
Scrip is an alternative to a legally binding tender. The person holding the scrip makes them eligible to receive something in return. They are commonly used as a form of credit, and the document itself is an acknowledgement of the debt.
In the stock market, scrip represents a temporary document that represents fractional shares resulting from a split or spin-off.
The better-known use of scrip is the currency issued by private companies like the example used in the introduction. Other popular uses of scrip are flyer miles, coupons and gift cards.
Scrip Issue or Bonus Issue
A scrip issue when a company creates new shares and rewards them to existing shareholders. It is better known as a bonus issue. This is not to be confused with scrip dividend, which is explained below.
Now, coming to their application in the stock market – Companies sometimes find themselves short of cash to pay dividends to shareholders.
In such circumstances, they provide a scrip dividend which gives them a choice of accepting dividends through cash or more shares. This is also known as a scrip election.
Pros and Cons Of Scrip
Besides the stock market, companies also use this concept for customer retention through gift cards. While a simple concept, it gives companies a higher chance of retaining customers and keeping them loyal, while also providing certain perks and benefits. This is just one advantage of scrip. Read below for both pros and cons of scrip.
Pros Of Scrip
The first advantage is for the issuing company of the scrip. They can limit cash outflows by issuing these private currencies. This is actually a double advantage as it also encourages customers to repeatedly conduct business with the company. Even if the customer is not satisfied with their purchase, they offer store credit which in turn causes them to return.
Now even in the markets, companies issue scrip dividends to reduce their cash outflow when there is a shortage. This allows them to retain cash as well as shareholders who are rewarded with extra shares by paying nothing extra. With the extra cash the company saves by not issuing dividends, it can reinvest it into other projects.
Cons Of Scrip
Now coming to the disadvantages of scrip. By reading about scrip, you can understand that it mostly works in the favour of the business or company, rather than the customer/shareholder.
If you were to buy a product or service and were dissatisfied, then your priority would be to return the product and find a replacement elsewhere. But since your refund is issued in the form of points or credit, you are left with no choice but to repurchase the product from the same business.
From a shareholder perspective, if a company is issuing scrip dividends instead of actually paying dividends, it raises the question of the solvency of the company. This is especially true for dividend shareholders, who hold the stock solely for receiving regular dividend payments.
The concept of scrip has existed for almost a century and it has given great advantages to both businesses and customers. With the future of finance shifting to digital currencies, do you think scrips will still exist through online tokens? Let us know below. Happy Investing! That’s all for the article Scrip Meaning In Stock Market – Pros, Cons & Types! We hope you enjoyed reading it. Happy Investing!
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