06 February, 2008

What is Stock Split ??

Stock splits are akin to getting two Rs 50 notes for a Rs 100 note. They’re aimed at making the stock more affordable and liquid for retail investors.

What is a stock split?
Stock split is the process of splitting shares with high face value into shares of a lower face value. It is like getting Rs 100 note changed for two Rs 50 notes. Does it change the value of your money? Not really. But now, you also have two smaller denomination notes which would be easily accepted by small vendors. A stock split increases the number of shares in a public company. The price is so adjusted such that the market capitalisation of the company almost remains the same.
Why split stocks?
Companies usually split their stock when they think the price of their stock exceeds the amount smaller investors would be willing to pay. “It is aimed at making the stock more affordable and liquid from retail investors’ point of view,” said Indiabulls CEO Gagan Banga. Generally, there are more buyers and sellers of shares trading at Rs 100 than say, Rs 400 as retail shareholders may find low-price stocks to be better bargains. Stock splits are usually initiated after a huge run-up in the share. This run-up may be
linked to the performance of the stock.
The company may declare such splits in different ratios like 2-for-1, 3-for-1, 3-for-2, or like in the case of Mr Gupta, 4-for-1. Some companies may go to the extent of declaring a 10-for-1 split, as power services company GVK Power did recently. To illustrate, say, XYZ Company is trading at Rs 250 and you hold 100 shares, which make the total value of your holding at Rs 25,000 (250 x 100). If this company declares a 2-for-1 stock split, your 100 shares become 200 and the share price is adjusted to Rs 125. The value of your investment still remains the same (this time, 125 x 200). And if the company had 10 lakh outstanding shares before the split, it will now have 20 lakh outstanding shares after this split, keeping the market cap unchanged.
Sometimes, companies may choose to club stock split issue with bonus shares. Bangalore-based jewellery manufacturer Rajesh Exports recently declared a 2-for-1 stock split along with a bonus offer of two shares for each share held. This means that each share becomes two, post-split. Now, for these two shares, shareholders will get four additional shares as bonus. Thus, one share translates into six after stock split and bonus issue. “To ensure increased liquidity for existing shareholders and easy entry point for new shareholders, the decision was made to split the share,” said Rajesh Exports chairman Rajesh Mehta.
How do shareholders benefit?
In pure financial terms, a split in itself is a non-event as fundamentally it changes nothing. However, stock split helps make shares more affordable to retail investors and provides greater liquidity in the market. It may happen that after the split, the stock price goes up as the demand for these shares increase.

Should one buy stocks of ‘splitters’?
Not necessarily. This depends on the confidence one has on the company’s fundamentals. The common logic of looking at a company’s fundamentals and stock performance stand true in this case too.

What are record date & no-delivery period?
The company announces the split ratio on a particular date called the record date. Anyone who wants to benefit, must buy stocks before the record date to be entitled for additional shares post-split. In the no-delivery period, trading is permitted in the scrip, however, these trades are settled only after the period is over. This is done to ensure that in
vestor’s entitlement for corporate actions like stock split is clearly determined. So, Mr Gupta, just relax, the markets have indeed corrected but your stocks have multiplied, in numbers at least.

Courtesy :: Economictimes

No comments: