Listed companies frequently engage in activities such as issuing bonus shares or distributing dividends. A stock split is one such activity where the number of shares rises, but the overall market value remains unchanged. This means each share’s price adjusts accordingly, maintaining its fundamental value.
What is Stock Split?
A stock split occurs when a listed company takes corporate action to divide each existing share into multiple new shares, without altering the total value of the shares. This ensures that each investor’s stake in the company remains the same. However, the total number of shares issued by the company increases.
A stock split primarily makes shares more affordable for investors without changing their total value. The company uses a specific ratio, like 2:1 or 3:1, to divide existing shares and generate additional ones.
Investors receive shares proportional to their current holdings, adjusted according to the split ratio. For example, a 2:1 split means each share becomes two, while a 3:1 split results in three shares for every original one.
There are several reasons for a stock split. One reason is psychological.
When the price of stocks increases, some investors may consider them too pricey. The stock is split to bring down the price, thus making it more affordable and attractive. While the actual value does not change, the lower price may draw in new investors. Present shareholders may also feel they are owning more shares, thereby increasing their potential gains if the prices increase.
Another reason is to boost liquidity. A stock split increases the number of shares, making trading easier and encouraging more buyers. Companies can also repurchase shares at lower prices without affecting liquidity too much.
Example of a Stock Split
For instance, when an ABC Company declares a 2-for-1 stock split and you own 100 shares priced at Rs 80, then your investment is Rs 8,000. When this split comes into effect, you have 200 shares at the price of Rs 40 each with the same value as Rs 8,000.
Types of Stock Splits
A company can implement two types of stock splits to adjust share prices: regular and reverse stock splits.
Regular Stock Split: The company increases its shares in number by producing more for the existing stockholders plus they will continue their dilution process once after lower pricing of shares than before; otherwise all previous effects accrue.
Reverse Stock Split: The company’s shares decrease. Take an example, you were holding 10 shares initially, and if there comes a 2-for-1 reverse stock split, you have only 5 now. Total value of your investment does not change. Supposing each share was Rs 4 prior to splitting; they now become worth Rs 8 and therefore having the same Rs 40 value as before. However, you now hold fewer shares.
Advantage of Stock Split
- High-priced stocks usually tend to lose some trading activity. However, the increase in shares and decrease in price would make the liquidity higher, allowing traders to trade at lower prices.
- When share prices are falling, portfolio managers can more easily buy and sell shares, since each trade is a smaller proportion of the portfolio.
- Selling options on high-priced stocks can be expensive. A stock split lowers the price, making selling put options cheaper and more affordable.
- Stock splits can often lead to a rise in share prices. Research shows that just announcing a stock split increased the price by 2.5% on average, and over a year, stocks that split outperformed the market by 4.8%.
As there are two sides to every coin, just as there are benefits, there are also some drawbacks to a stock split.
Disadvantage of Stock Split
- Stock splits can lead to market volatility. When shares become more affordable, more investors may decide to buy, which can increase price fluctuations.
- Not all stock splits result in higher prices. Some splits, like reverse stock splits, occur when a company’s stock is at risk of being delisted, and these typically don’t boost share prices.
List of Upcoming Stock Splits:
Company Name | Old FV | New FV | Announcement | Record | Split Date |
Shish Industries | 10 | 1 | 30th Oct | 17th Dec | 17th Dec |
PC Jeweller | 10 | 1 | 30th Sept | 16th Dec | 16th Dec |
Exxaro Tiles | 10 | 1 | 14th Oct | 13th Dec | 13th Dec |
Shradha AI Technologies | 5 | 2 | 23rd Oct | 10th Dec | 10th Dec |
Global Education | 5 | 2 | 22nd Oct | 10th Dec | 10th Dec |
Shradha Infraprojects | 5 | 2 | 26th Oct | 10th Dec | 10th Dec |
Achyut Healthcare | 10 | 1 | 19th Oct | 10th Dec | 10th Dec |
Eraaya Lifespaces | 10 | 1 | 19th Oct | 6th Dec | 6th Dec |
Consecutive Investments & Trading Co | 10 | 1 | 16th Oct | 6th Dec | 6th Dec |
Tara Chand Infralogistic Solutions | 10 | 2 | 1st July | 5th Dec | 5th Dec |
Frequently Asked Questions (FAQs)
What is a stock split?
A stock split is when a company divides its existing shares into more shares without changing the overall value, making shares more affordable.
Is a stock split good for the stock?
A stock split signals company growth and makes shares more affordable for investors.
Who benefits from a stock split?
The company benefits by increasing liquidity.
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