Stock Splits & Their Effects | Learn Fundamental Analysis
Companies, during their journey, take various corporate actions which impact their financial structure and stakeholders. Corporate actions include dividend payout, rights issues, bonus issues, mergers and acquisitions, stock splits, etc. A stock split is one such corporate action that many companies attempt. In the financial year 2021-22, as many as 169 companies went for a stock split. Keep reading to learn about Stock Splits & Their Effects and whether it’s worth investing in a company after a stock split.
What is a stock split?
A stock split is a corporate action where a company increases the number of shares by reducing the face value of the stock. A split increases the number of shares by decreasing the face value, but the total value of the investment remains the same. Though there is an increase in the number of shares, the overall market capitalization of the company and the value of each shareholder’s stake remain the same. The stock split happens in a specified ratio. For example, if the ratio is 1:5, it means that for every one share held the shareholder will get 5 shares respectively.
Say if the stock’s face value is ₹50, and there is a stock split in the ratio of 2:1, then the face value will change to ₹25. If you owned 1 share of ₹50 before the split, you would now own 2 shares of ₹25 after the split. The investment value remains the same, ₹50.
Why Companies Split Their Stocks | Stock Splits & Their Effects
To lower the trading price to a more comfortable range for most investors | To improve the liquidity in the stock
Most investors are more comfortable purchasing, say, 100 shares of a $50 stock as opposed to 1 share of a $5,000 stock. So when the share price has risen substantially, many public companies end up declaring a stock split to reduce it. Although the number of shares outstanding increases in a stock split, the total dollar value of the shares remains the same compared with pre-split amounts, because the split does not make the company more valuable.
How does a stock split affect you? | Stock Splits & Their Effects
If you are an existing shareholder, a stock split may appear to have no noticeable effect but it eases your portfolio management and provides more liquidity with an increase in the number of shares
If you are not a shareholder of the company that went for a stock split, you have an opportunity to buy the shares now at a lower price than before.
For example, if IRCTC share price was at ₹ 4500. After a stock split in the ratio of 1:5 in Oct-22, the share price of IRCTC would become ₹900 making it affordable for new investors and giving the existing shareholders flexibility to manage their portfolios.
Key dates in a stock split
Record date is the date on which the company checks its records to identify the eligible shareholders for a stock split.
Ex- split date– is the date on which the stock starts trading at the new adjusted split price.
The existing shareholders acquires the sub divided credited shares with the new ISIN on the immediate next trading day after the record date.
What Is A Reverse Stock Split? | Stock Splits vs. Reverse Stock Splits
As the name suggests, the reverse stock split is a corporate action in which the company merges existing shareholders’ multiple shares into one share. This way, the company reduces the number of outstanding shares while maintaining its market capitalisation. In a reverse stock split, the investor’s overall invested amount remains the same, whereas the value of an individual share increases.
For instance, if a company goes for a 2:1 reverse stock split, its existing shareholders will get one share for every two shares they own.
Final Takeaway | Stock Splits & Their Effects
Stock split often brings an excellent opportunity for investors looking to buy a stock they can’t afford. However, it is not advisable to buy a stock just because it is getting cheaper. Neither buying the stock before nor after the stock split offers you assured returns. There is no accurate answer to whether the stock split is always good or bad. However, investors usually tend to consider a stock split optimistically. If the stock performed well before and the investors are bullish about the stock’s future outlook, there are higher chances that the stock will go up after a split.
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To check which companies offers stock split this year, visit https://www.livemint.com/market/stock-market-news/these-stocks-announce-bonus-issue-stock-split-check-here-11670688034941.html