Stock split is dividing the existing shares in different ratios according to the reduction of the face value.
Too much to take?
Let’s step back and understand from the basics!
Stock Split – Basics
An investment in knowledge pays the best interest. An investment with knowledge in stocks could yield good profits.
Stocks date back to the Roman Republic and officially started trading in the 1600s and now are the backbone of the economies of countries across the world.
The face value of the stock is the actual value of the stock decided at the time of issuance.
With time, a stock may see an increase or decrease in its face value and in case the face value is decreased, the existing share base is divided based on different ratios/parameters leading to the concept of Stock Split!
When a stock split is introduced, it increases the number of shares in the secondary market but the market capitalization remains the same. The issue of bonus shares which increases the number of shares in the market is not the same as the stock split.
Stock Split: How It Works?
The stock split is done by decreasing the face value of the share. The face value of the share is the value printed in the share like that of a rupee note. That is the base price of the stock.
Previously the face value for high-value companies like ACC and other companies used to be ₹100. Now the normal face value is only ₹10. Depending on the company’s performance the shares come public with a premium to the face value.
And therefore some of the equity goes public while the most remaining is held by the promoters to consolidate their ownership of the company.
Trading Of The Public Limited Stock:
Once some of the stocks are bought by the public including the mutual funds, institutions like banks, high net worth investors and public it starts trading in the exchange. If the performance of the company is extraordinary the stock price soars and constantly increases in the market.
At one point, it becomes high enough for investors and traders to buy or trade in it. Also, the brokerage charges shoot up with the increase in price. Hence a necessity of splitting the stock becomes necessary.
Ratio Of The Split In Stock:
According to the board of directors of the company, the stocks are split in various ratios according to the decrease in face values. It could be 2:1 with a decrease of the face value to ₹5 from ₹10.
That is each shareholder with 1 share of the company now has 2 shares. If the face value is reduced to 1 from 5 it is in the ratio of 5:1. For every one share, the shareholder gets five shares.
But the price will be accordingly reduced as per the ratio. It if it is 2:1 the price will be half of the price before the split.
Stock Split – Example:
One of the best examples for an Indian company stock split is Infosys.
Its stock was listed in Bombay Stock Exchange (BSE) on 14th June 1993 at ₹145 against the issue price of ₹95 with a face value of ₹10. If somebody has bought 100 shares of Infosys at ₹95 or 145 amounting to an investment of ₹9,500 or ₹14,500 respectively at that time now they will be holding 34128 shares which are valued now of ₹2.11 crores at the current market price of ₹620.
The stock split in 1999 was to bring the face value from ₹10 to ₹5 and the bonuses issued by the company including the latest one on 12.9.2018 in the ratio of 2:1.
Stock Split – Benefits:
Investing in the right stock brings in stupendous returns by way of stock splits. It is an indication of the better performance of the stocks. The Face value may be reduced from 10 to 5 or even 1 but the market capitalization will remain the same.
The major benefit will be the increase in price after the stock split. Many kinds of research have confirmed that stocks which have undergone split have become successful and profitable for the investors.
Once the stock is split to one extent the company will start issuing bonuses which are a boon to the investors. This could multiply their investments to manifold levels.
Stock Split – Concerns:
Investing in the wrong stock will lead to a reverse stock split which is the opposite of stock split and could have adverse effects.
The share prices will not have any appreciation and there is also barring of the stock from the exchanges.
This could result in loss of a major part of the capital investment. Also for shares in the physical form for stock splits they have to be sent to the companies for name transfer and in other cases, there could be difficulty in receiving the physical shares in time for sale and many other reasons.
Stock Split – Summary
The stock split is a boon or bane depends on the stock invested. The split stocks are considered the best stocks in the market. These splits always have a huge volume of improvement along with a tremendous rise in the stock price to benefit the investors.
The stock split does not change the fundamental value but changes the prices in favour of it with each stock split to benefit the investors. The bonuses after the stock splits are the real befitting reward to the right investment in these stocks.
The financial prosperity and with it a peaceful life is possible by choosing the right stock to invest.
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