Just like events happen across the world every moment, they happen in the stock markets too. These events in the stock markets are termed as ‘corporate actions.’ Corporate actions are measures that the companies listed on the stock exchanges take. They range from declaring dividends, share buybacks, bonus issues, rights issues, to stock splits.
A newbie investor hearing these terms for the first time will get confused regarding what these mean for him/her as a company’s shareholder. So in this article, we’ll discuss in detail stock splits, why do companies come up with a stock split, and what are its benefits for investors. The article is then followed by some examples of recent and upcoming stock splits.
What does splitting of a share mean?
Splitting a share can be thought of as slicing it into smaller pies, but the total value of the investment remains the same. This can be compared to eating a pizza. Since you may find it difficult to eat the whole pizza in one go, you cut it into pieces. But all the pieces still belong to you. You just have made smaller divisions.
What is a stock split?
In a stock split, there are no new shares issued by the company, the existing shares get split or divided as per the split ratio announced by the company. Suppose a company announces a 1:2 stock split. This means 1 share held by the shareholder will become 2. Hence, if the company had 1000 shares outstanding, it will now have 2000. Needless to say, the share price will halve in this case.
To simplify, a stock split refers to the division of a share into multiple smaller shares. As a result, the share price also gets reduced proportionately. Similar to a bonus issue, a stock split also leads to improved liquidity in a company’s share. Here also, the company’s earnings per share (EPS) decrease proportionately. But unlike a bonus issue, the future dividend per share will also reduce in proportion to the split ratio.
Why do companies split stocks?
You might now ask that why do companies come up with stock splits. The premise is simple. There is one important reason why companies do so. Consider this example.
Let’s say that the price of a company ‘ABC Limited’ on the stock exchange is currently ₹10,000/share. And the company announces that it is coming up with a 1:1 stock split. As a result of this, each share of ₹10,000 will now be split into two shares of ₹5000 each.
Now, those investors who were considering the stock as expensive at ₹10,000 may now think of buying it at ₹5000. Although the share price should be judged in the context of the business fundamentals, there’s psychology at play. ₹10,000/share seemed expensive, but ₹5000/share can be considered.
Hence by doing this, companies can enhance liquidity in the trading of their shares as this enables a larger number of investors to consider buying and selling in its shares.
How do investors benefit from stock split?
As the number of shares, you as an investor hold increases as per the proportion announced by the company, the price per share declines accordingly. Hence, in the context of the value of your investment, there is no change.
But for those investors who weren’t already the shareholders, a stock split enables them to consider buying the shares. This ability of more people to buy a share can pump up its share price, which can increase the company’s value, at least temporarily.
Also, since there are more shares available at lower prices, it becomes easier for investors to diversify and rebalance their portfolios. Besides, the stock price has a higher room for upside as it has become low-priced now. In a nutshell, greater affordability and increased liquidity are the primary benefits of stock splits to investors.
Some recent stock splits
Given below are some of the recent stock splits that happened in the Indian stock market:
- Indian Railway Catering and Tourism Corporation Limited (IRCTC)
- TTK Prestige Limited
- Earum Pharmaceuticals Limited
- Hindustan Everest Tools Limited
- Gujarat Ambuja Exports Limited
Some upcoming stock splits
Given below are some of the upcoming stock splits in the Indian stock markets:
- Eldeco Housing Limited
- Indo Amines Limited
- IPCA Labs Limited
- SBI Gold ETF
- Johnson Pharma Limited
There’s a famous saying that goes like this, ‘If I have nine hours to cut a tree, I’d spend eight hours sharpening my axe.’ It is important to educate yourself before starting any task. Knowing the process and logic helps you complete it easily.
The same also applies to the stock markets. Knowing the differences between various terms avoids the scope of any confusion and helps in taking the right actions. As is rightly said, ‘An investment in education pays the best interest.’ Hence, do not stop educating yourself. The day your curiosity ends is the day you stop growing!