What is a stock split ?
When a company announces a share split, the number of shares increases, while the market capitalization remains constant.
In this case, the existing shares would be split, but their intrinsic value will remain the same. With an increase in the number of shares already split, the price of each share become more affordable to investors and liquidity and trading volume for shares increases. This is a positive sign for both existing and potential shareholders.
A stock split occurs when a company raises the number of its shares to enhance the stock's liquidity. In a specific multiple, the number of shares outstanding increases subsequently.
A stock split situation occurs when a publicly traded company takes corporate action to break down each current share into multiple new shares and maintains the overall share value unchanged. Every investor's stake in the company stays identical, although the corporate action multiplies the company's shares.
The Google stock split is an example of a company increasing the number of its shares without changing its overall market value, thereby making the stock more accessible to investors and boosting liquidity and trading volume.
How a Stock Split Works ?
For some companies, at some point, the quoted price of the shares in the market is too high for investors, reducing market liquidity because of fewer investors who cannot afford to bear the stock price.
A stock split, such as the 10:1 split by a company means the pierce per share ideally reduces by 10 times makes shares more affordable to small investors, improving liquidity and potentially boosting demand and stock prices.
Companies generally choose to split their stock to reduce the trading price to a range that is more accessible for most investors, and they do this to improve trading liquidity of their company's shares.
What happens when a stock splits?
A stock split typically does not have much effect on the company’s market capitalisation . A stock split occurs when a company establishes a specific ratio to calculate how many new shares are created for each existing share.
Investors will receive the same amount of shares as they had before the split, except the shares will be adjusted for the stock split. The most typical stock split ratio is 2-for-1. If a split ratio were 2:1, this means that shareholders would receive two shares for each one they had before the split.
Example
Canara Bank split its shares for the first time at a ratio of 1:5:
1. Face value: Each share with a face value of Rs 10 was split into five shares with a face value of Rs 2 each
2. Record date: May 15, 2024 was the record date for the split
3. Share price: If the current market price of Canara Bank was Rs 550 per share, the adjusted share price after the split would be Rs 110
The stock split was intended to:
Increase liquidity, Make the bank more affordable for retail investors, Broaden the retail investor base, Increase trading activity, and Be particularly beneficial for smaller investors.
The stock split caused Canara Bank's shares to increase by nearly 5%
Types of Stock Splits
Regular stock split
A company will do two different things to make the company's shares more attractive to small investors:
First, it will choose to increase the number of shares in circulation by giving additional shares to existing shareholders.
Secondly, the company will cause the number of shares to increase, causing a price drop. Therefore, a company's value and market capitalization stays constant as the number of shares rises, and prices fall.
Reverse Stock Split
A reverse stock split raises the share price by decreasing the total number of shares, such as converting five shares into one. Quantity of shares owned by the Investors will get reduced but often the value will remain the same.
In a reverse stock split, the supply of shares ends up being reduced. For instance, if you owned 10 shares of a stock and the board of directors declared a 2-for-1 reverse stock split, after the adjustment, you would own five shares.
The overall value of your shares would still be the same. If the 10 shares were worth Rs. 4 per share before the reverse split, the five shares would be worth Rs. 8 per share after the split. In each case, the value of your total investment is still Rs. 40. However, you would own less shares than you did prior to the split.
Advantages of a Stock Split
Increased Liquidity:
A lower stock price can make shares more accessible to a broader range of investors, which may lead to increased trading volume and improved liquidity.
Enhanced Marketability:
By lowering the share price, stock becomes more attractive to lower-end investors, potentially broadening the shareholder base.
Positive Market Perception:
A stock split can be viewed as a positive take away for the business, potentially indicating management confidence in the future.
Psychological Appeal:
While the value of the asset actually doesn’t change, lower-priced shares can appear more affordable and attractive to retail investors.
Disadvantages
Could Increase Volatility
stock splits can lead to market volatility due to the adjusted share price. If the stock becomes more affordable, additional investors may choose to buy in, potentially increasing the company's volatility.
Not All Stock Splits Increase Share ‘s trading volume and liquidity
Some companies execute reverse stock splits to avoid delisting when their stock price falls below a certain threshold.
Perception Risks:
If investors misinterpret the split as a fundamental improvement in the company's value, it could lead to inflated stock prices and subsequent corrections.
No Real Value Change:
The total market value of the shares remains unchanged, and the split does not improve the company's fundamentals or profitability.
Reason of a stock split
Making stock more affordable
A stock split can make a company's stock more affordable for investors, especially smaller investors, and may allow some investors who were previously priced out to buy.
Increasing liquidity
A stock split increases the total number of shares available, which can improve trading liquidity.
Increasing marketability
A stock split can make a stock more appealing to investors, especially those who may be deterred by a high share price.
Indicating growth
A company that is growing or expects to grow may split its stock to signal this to investors, which could help the company grow further.
Increasing shareholders
A company that perceives its stock as overvalued might implement a split to boost the number of shareholders.
FAQs
1. What is a stock split and why do go for this ?
- A stock split is when a company increases the number of its shares to enhance stock liquidity. Companies take this action to lower share prices for investors, enhance liquidity, and possibly expand their shareholder base.
2. How does a stock split affect the value of my investment?
- A stock split does not change the total value of your investment. Although you will own more shares, the price per share will decrease proportionally, keeping the overall value constant.
4. Why do some companies, like MRF, not announce stock splits and keep their share prices high?
Companies like MRF don't split its shares to maintain exclusivity and attract long-term investors. High share prices reduce speculative trading and encourage serious investors in the Company Shareholding.
5. What happens to the stock price after a split?
After a stock split, like Reliance’s 10:1 split, the price decreases but the number of shares increases. The total investment value stays the same, though the stock becomes more accessible to retail investors.
6. What is the difference between a regular stock split and a reverse stock split?
- A regular stock split increases the number of shares and reduces the price per share, while a reverse stock split decreases the number of shares and It raises the price of each share while maintaining the total market value.
KEY COMPANIES WHICH RECENTLY SPLIT THEIR STOCKS :
| Company | Current Price (INR) | Price Before Split | Split Ratio |
| Power Grid Corp | 356.4 | 475.2 | 4:3 |
| Canara Bank | 112.36 | 561.8 | 10:2 |
| Nestle India | 2,701.10 | 27,011.00 | 10:1 |
