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.
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. 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.
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.
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!
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