Scrip is a term that denotes a form of receipt, certificate, or a representation of value which is not considered currency but is recognized and accepted by both payer and payee. It can often be converted into actual currency or goods/services. Scrip finds widespread use in various contexts including financial transactions, securities, corporate finance, and exchanges.
Types of Scrip
Corporate Scrip
Corporate scrip commonly refers to a temporary document issued by a corporation to represent a fractional share of stock. This situation often arises from corporate actions such as:
- Stock Split: A corporate action whereby a company divides its existing shares into multiple shares to boost the stock’s liquidity.
- Spin-Off: Occurs when a company creates a new independent company by selling or distributing new shares of its existing business.
Transactional Scrip
Transactional scrip is an alternative form of currency issued by private entities, like companies or local governments, which can be used within specific areas or communities for purchasing goods and services.
Historical Context of Scrip
The use of scrip has a long and varied history, particularly prominent during times of economic instability or hyperinflation, where conventional currency’s value was volatile. Historical examples include:
- Company Scrip: Issued by employers, particularly in the mining industry, to pay workers in lieu of cash. Scrip could be used at company-owned stores, often leading to economic exploitation.
- Local Currencies: Used during times of crisis, like the Great Depression, where municipalities issued scrip to alleviate currency shortages.
Special Considerations
While scrip can provide flexibility, it also has potential downsides:
- Legal and Regulatory Issues: Issuing scrip can sometimes conflict with national currencies and may be subject to regulatory scrutiny.
- Acceptance and Trust Issues: For scrip to be effective, both parties in a transaction must trust and accept it as a valuable medium.
Examples of Scrip Usage
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Corporate Scrip Example:
- Company A undergoes a 2-for-1 stock split and issues scrip for fractional shares to stockholders. This scrip acts as a temporary placeholder until consolidated into whole shares.
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Community Scrip Example:
- During a local festival, the organizing committee issues scrip that visitors can purchase and use at various stalls, providing a convenient transactional medium limited to the event’s venue.
Related Terms
- Stock Split: A corporate action that increases the number of shares in a company by issuing more shares to current shareholders.
- Spin-Off: The creation of a new, independent company through the sale or distribution of new shares of an existing business.
- Dividends: Payments made by a corporation to its shareholders, usually in the form of cash or additional stock.
- Convertible Securities: Types of financial instruments like bonds or preferred stocks that can be converted into a different form, typically equity shares.
FAQs
What is the primary purpose of scrip?
How does scrip affect stockholders during a stock split?
Is scrip considered legal tender?
Can scrip be issued by private companies?
References
- “Corporate Finance: Principles and Practice” by Denzil Watson and Antony Head.
- “The Complete Guide to Stocks & Stock Pricing Models” by Richard Brealey and Stewart Myers.
- “History of Money: From Ancient Times to the Present Day” by Glyn Davies.
Summary
Scrip represents a versatile, albeit non-currency, form of transaction that finds a place in both corporate financial actions and alternative transactional mediums. Its utility in representing fractional shares during stock splits or spin-offs makes it a valuable tool for corporations, while its historical usage underscores its adaptability in varied economic climates. Understanding scrip allows for a better grasp of complex financial actions and community-based economic initiatives.
