There are various reasons why investors are drawn to the share markets for garnering substantial rewards these days. In fact, in the present day and age, with the rise of technology and smart apps to conduct trading with, a plethora of young traders can be found trading on an almost daily basis, balancing work life, or even education, with trading activity. The share market can have a number of rewards for shareholders, not just in terms of profits, but also with regular dividends on share investment. Other benefits of investing in the share markets include a share split, and this needs to be understood well by any shareholder.
During their regular course of business, listed companies take a lot of corporate actions. By corporate actions, we mean distribution of dividends, issue of bonus shares, and stock splits. Distribution of dividends is usually the most popular and often used by companies, stock splits, on the other hand, is quite rare to come by. Wondering what a stock split is? Here’s some information that can give you clarity on this unique corporate action.
To understand stock split meaning, you must first think of it as an action that a company whose stock you have undertakes. A stock split is a corporate action, where a company splits its shares into multiple new ones. Split shares neither add any new value, nor dilute the ownership stake of the shareholders. However, what they do is increase the number of shares of the company. A stock split could well make the shares of any given company seem more affordable. However, when the company’s stock splits, there is no real alteration in the company’s value. Here’s an example to help you understand the concept better.
Imagine a company. It has issued around 1,00,000 equity shares of face value of Rs. 10 per share. The company decides to split its shares in the ratio of 2:1. What this essentially means is that every share of the company will now be split into two. This will, in effect, increase the number of equity shares of the company to 2,00,000 from the erstwhile 1,00,000. And simultaneously, the face value of the shares would also come down to Rs. 5 per share. By now, you would have clearly understood the stock split meaning.
Now that you know the stock split meaning, let’s take a look at how it benefits shareholders.
1. It makes the shares more accessible
High share prices is one of the primary reasons why companies choose to split shares. When a company’s share price rises exponentially, it can dampen the investor demand.
Investors, especially retail investors, generally prefer buying 10 shares that are priced at Rs. 500 per share than buying 5 shares that are priced at Rs. 1,000 per share. However, through share splits, a company can reduce its share prices and can make it more accessible to investors without changing its value whatsoever.
2. It increases liquidity
Another one of the main stock split benefits is that the shares of a company generally see increased liquidity. Since shares have now become more accessible to retail investors, more people would show increased demand for it, which can increase liquidity in the counter. Buying and selling shares will be far easier after a stock split.
Any upcoming stock splits may excite investors for all the good reasons mentioned before. When any company’s stock undergoes a split, the resultant share price may be increased. This is often followed by an almost immediate decrease in the price, but investors may well turn a profit if they act fast. The reason for the initial price increase is that many small investors may want to buy the newly “affordable” stock, increasing demand for it. Another possible rationale for the price increase could be that a stock split gives the market a clear signal that the share price of any company is on the rise. Individuals automatically assume that this growth will continue into the future. This lifts the demand further and the prices as well.
In a stock split example from the real world of share market investment, Apple Inc. split its company’s shares at seven-for-one. This was largely done with the aim of making the company’s shares more accessible to several investors. In the period just preceding the split, the price of the share was at about $649.88. When the split finally occurred, the per share price at the opening bell of the market was at $92.70, in other words, 648.90/7.
Other Advantages of a Share Split
Along with a split in shares and the benefits it may hold for many investors, both large and small, there are some additional benefits. These, of course, vary from company to company and their financial and other objectives. In the example of Apple Inc., existing holders of shares received six additional shares for every share that was owned by them. So, if any given investor owned 1,000 shares of Apple Inc. before the splitting activity, had 7,000 shares after the stock was split, along with the additional amount of shares allotted. By the time the split took place, the company’s shares increased from 861 million to 6 billion. Nonetheless, the market capitalisation of Apple Inc. remained more or less the same as before the split, at $556 billion.
As with other corporate actions like bonus share issues, stock splits are also automatically credited to your demat account within 4-5 days from the record date issued by the company. You can check your demat holding statement to ensure that the split shares are credited appropriately. Want to create an online demat account, but don’t know where to start? How about reaching out to Motilal Oswal? You can create one for free within minutes. Get going now!