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There is no problem with Stock Split

There is no problem with Stock Split

There is no problem with Stock Split

There is no problem with Stock Split

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Stock Split has become a significant concept if you are not updated with market news and your number of shares in the portfolio gets increased overnight. 

Let’s look at a case study of an Investor which is based on irctc stock split.

One day before he had 1 stock of IRCTC but on the next day, he had 5 stocks of IRCTC. 

What just happened overnight?

A company divided its shares in a specific ratio. As a result, the face value of the smaller denomination is lower. 

as the phrase split, you can remember that a stock is split into small pieces having less face value

Let’s deep down into the stock split. 

Deep Down: Stock Split

Well, It is a type of corporate action. The Board of directors announces that they are going ahead with a stock split in the ratio of 5:1 (5 for 1). This means that each stock will be split into 5 new stocks. 

Assume if a shareholder has only 1 share of ABC LTD, then he will have 5 stocks after the stock split. 

Let’s look at the stock split example: Assume that you have 1 stock of either motor and it is trading @ Rs.30,000/- and each share has a face value of 10. 

Can you afford it? Most of us can’t afford it since its price is Rs.30,000/- 

The Board of directors announces that we are going with a stock split in the ratio of 10:1 (10 for 1) which means in exchange for every 1 stock investors will get 10 new stock.

Let’s look at the portfolio.

Pre Split: The investor has a stock of EICHER MOTOR and the value of the portfolio is Rs.30,000/-. Here 1 stock has a face value of Rs.10/-.

Post Split: The investor has 10 stocks of EICHER MOTOR and the value of each stock is Rs.3000/- which results in the value of the portfolio being Rs.30,000/-. Here 1 stock has a face value of Rs.1/-. 

NO CHANGE IN PORTFOLIO but as we already know that demand and supply of the stock are responsible for the price of the stock. therefore it may get changed from Rs.3000/- on any side up or down. 

 

Pros of Stock Split

  • It increases the number of holding shares let’s say pre-split you are holding 10 shares then post-split you will the multiple of the shares of that ratio which the board has announced. 
  • It increases liquidity so that more numbers of investors can afford it and more volatility can be seen in the stock. 
  • Some Investors find arbitrage opportunities to trade in the split stocks. 

Cons of Stock Split

  • It doesn’t increase the value of the company. 
  • The price of the stock goes down, but market capitalization remains the same.
  • Since the price of the stocks has decreased scammers can easily take entry into such stocks and ring trading can also happen in the stock. in which noob investors will get stuck and then they will say GOODBYE to the market. 
  • From the Company’s lens, The company has to pay some fee if they want to go for a stock split and this is also considered as an Expense. 

Fun Fact

  • MRF is the costliest share of the Indian Stock Market and they have never gone through the Stock Split process, What do you think can scammers do scams on this stock? Well, They won’t be since it is the costliest stock and they won’t be able to give buy call on the stock to their clients. 
  • BERKSHIRE HATHAWAY company of Warren Uncle has never gone for a stock split, he believe that if he go for a stock split then his company has to give some fees to NYSE, Regulatory and other authorities since he didn’t want to have this expense so he avoids the stock split for his own company.

If we have to give you some glimpse about what is stock split then

A split is a book entry in which the face value of a share is changed in order to increase the number of shares
 
No new capital is required for this process. The proportional holding of shares remains unchanged.
 
By Splitting a stock, the liquidity increases in the same stock, and no investors can afford it.
 

We hope We gave you some insights about the stock split and delivered it in the best possible way. 

Let us know what you think about the stock split. leave your precious comment, and We will respond to it. 

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To your Investing and Financial Journey

Cheers

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RuPay Rajat

Making Finance Easy

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