Stock splits are one of the most common corporate actions in India and across the world. A stock split or share split is about reducing the par value of a stock. For example, reducing the par value of the stock from Rs.10 to Rs.5 is a 2:1 stock split and reducing the par value from Rs.10 to Rs.1 is a 10:1 stock split. Having understood the stock split meaning, let us get into detail about what is a stock split.
Stock splits are normally done to reduce the market price of the stock and bring it into a more popular range. All stock splits and share splits are value-neutral in that they do not impact the value of the company in any way. Let us now look at the share split meaning and its implications in greater detail.
WHAT IS STOCK SPLIT OR SHARE SPLIT
A Stock split happens when a company decides to split one share of its stock into more shares. The very name of stock split or share split is so suggestive that you cannot miss it. Post the stock split, the total combined value of the split shares still equals the price of the previous one share. Let us understand this share split story with an example.
In the above illustration, if you are a shareholder, your shareholdings are up 5 times but your price is down to approximately one-fifth. That means; the impact is almost marginal. That is why it is said that the stock split is value-neutral. However, there is an important point to note. When a high-priced stock is split, the price comes into a more popular range so more retail investors get interested in the stock and this higher demand takes the price higher. However, in terms of the valuation of the company, the stock split is still valued neutral
To cut a long story short, in a stock split, investors who own stocks still have the same amount of money invested, but now they own more shares at a proportionately lower price. But as we saw above the value may not exactly be the same and normally, the stock split tends to make the stock more valuable due to its wider reach. That is normally one of the most popular reasons for companies to do a stock split.
How exactly does a Stock Split Work?
Most companies grow over time and that makes the stock price trade higher. At some point, the price of the stock may just be too expensive for investors to afford, and that has a bearing on the market liquidity as there are fewer and fewer people capable of buying a single share. How many retail investors do you see buying one share of MRF for Rs.80,000? Do you get the answer and the justification for a stock split?
Let us once again remember that stock splits don’t add value as they are value-neutral. The number of shares goes up by a multiple and the prices come down almost proportionately. However, it has been observed that when solid companies do stock splits, they tend to be value accretive in the long run. To an extent, it is due to the stock split as it brings the stock in a more popular tradable range.
Understanding stock split ratio
Normally, the par value of Rs.10 is split to either Rs.5, Rs.2, or Rs.1. These are the most common types of stock splits.
How is a stock split advantageous?
There are 4 ways in which a stock split is valuable to the investors in stocks.
Stock splits improve liquidity. When a high-priced stock is split and brought into a more popular trading range, the liquidity improves.
Stock splits make portfolio rebalancing easier since lower-priced stocks are more liquid and hence easier to sell and churn.
This is more psychological, but the stock split reduces the risk for an option buyer optically as the option premiums come down.
If not all the cases, stock splits tend to be price accretive in most cases due to improved liquidity.
WHAT IS BASKET ORDER
Basket orders are for a portfolio of stocks, where the investor allocates an overall amount to the basket and the system accordingly buys individual shares in the appropriate proportion as mentioned. It is possible to buy and sell a basket of stocks in bulk through basket orders. Basket orders charge concessional brokerage in the stock trading app.
WHAT ARE DIFFERENT TYPES OF EQUITY SHARES
In India, you still don’t have concepts like Class-A and Class-B shares like in the US. But you have shares and DVRs which have differential voting rights. You can also have fully paid up shares and partly paid-up shares in the market.
To cut a long story short, in a stock split, investors who own stocks still have the same amount of money invested, but now they own more shares at a proportionately lower price.
A stock split won't change a company's fundamentals, but it makes shares more affordable for smaller investors. Stock splits are generally bullish—at least in the short term—but the exact reason remains something of a mystery.
A stock split is when a company divides its stock into multiple shares, effectively lowering the price of each share without changing the company's market value. It's akin to cutting a cake into smaller slices; you end up with more pieces, but the total amount stays the same.
An offer of more shares to existing shareholders. Over 2 million + professionals use CFI to learn accounting, financial analysis, modeling and more. Unlock the essentials of corporate finance with our free resources and get an exclusive sneak peek at the first module of each course.
A stock split doesn't change anything fundamental about a company or its stock. Though the per-share price will be lower, the maneuver doesn't impact valuation in any real way. That means that post-split, the stock actually could be more expensive than it was beforehand.
A stock split doesn't add any value to a stock. Instead, it takes one share of a stock and splits it into two shares, reducing its value by half. Current shareholders will hold twice the shares at half the value for each, but the total value doesn't change.
Stock splits can improve trading liquidity and make the stock seem more affordable. In a stock split the number of outstanding shares increases and the price per share decreases proportionally, while the market capitalization and the value of the company do not change.
A stock split increases the number of shares outstanding and lowers the individual value of each share. While the number of shares outstanding change, the overall market capitalization of the company and the value of each shareholder's stake remains the same.
Stock splits come in multiple forms, but the most common are 2-for-1, 3-for-2 or 3-for-1 splits. For example, let's say you owned 10 shares of a stock trading at $100. In a 2-for-1 split, the company would give you two shares with a market-adjusted worth of $50 for every one share you own, leaving you with 20 shares.
So, the board of directors of a company decides to introduce a stock split when their share prices rise. The board of directors can choose any split ratios like 2:1, 3:1, 5:1, 10:1, or 100:1 etc. A 3-for-1 represents that for every share you hold in Company X after the stock split, you'll own three.
– Stock splits have no tangible impact on a company's total value—they simply create more shares at more affordable prices. Nor does a split change the total value of an investor's portfolio holding per se.
While stock splits have traditionally been viewed as a strategic move to make shares more affordable and accessible to investors, there is growing evidence that they may also serve as a powerful tool for employee retention.
Stock splits don't create a taxable event; you merely receive more stock evidencing the same ownership interest in the corporation that issued the stock. You don't report income until you sell the stock. Your overall basis doesn't change as a result of a stock split, but your per share basis changes.
Companies often undertake stock splits to enhance their stock's liquidity and accessibility. A high share price can deter potential investors due to the substantial investment required for acquiring a single share.
A reverse stock split does not directly impact a company's value (only its stock price). It can signal a company in distress since it raises the value of otherwise low-priced shares. Remaining relevant to investors and avoiding share delisting are the most common reasons corporations pursue this strategy.
Introduction: My name is Aracelis Kilback, I am a nice, gentle, agreeable, joyous, attractive, combative, gifted person who loves writing and wants to share my knowledge and understanding with you.
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