Investors may be excited about upcoming stock splits, but, as an investor, you should know that a stock split doesn’t really do much in the way of making a difference to your equity. Why? First, you have to understand the dynamics of a stock split and then you will grasp why, unfortunately, you may not really prosper much.
Upcoming Stock Splits - Understanding Splits
After you go ahead and open a demat account to invest in the stock market, you may hear about stock splits. Technically, a stock split is referred to as a corporate action taken when a company wishes to divide its current shares into more shares. Basically, a company is multiplying its shares. Companies do this to lower the price at which a share is trading. Now, you may well ask why they do this. Well, they wish to decrease the price to an acceptable range, one that is viewed as comfortable by investors, in order to raise the share liquidity. You can think of it like this - the psychology of humans being what it is, many investors feel at ease when they buy, say 200 shares of Rs. 100 stock compared to 10 shares of Rs. 200 stock.
What’s the news on upcoming splits?
What a stock split does is that it raises the amount of outstanding stock, and therefore, takes the liquidity up. The valuation of the stock may not change. News on the upcoming splits of March 2023 may not be out yet, as they may be announced in March itself, but we know of one stock that has announced a split of its shares. KP Energy is a company that will undergo a split of its shares in early March.
If you had intentions of investing in KP Energy when it was an upcoming IPO, you would have very likely seen huge gains by now. Although the company boasts a small market capitalisation, and is valued at about Rs. 432 Cr, it operates the country’s energy industry. It is the leading power solution provider in the sector of wind energy and functions from Gujarat where it was established. The approval of the stock split ratio stands at 1:2. According to the company’s board, the rationale behind the split is the increase of liquidity, attempting to encourage small investors to buy and trade in the stock by making it affordable.
Watch Out for More Splits
There may be no more definitive news on upcoming stock splits in March, but some analysts have estimated that some companies will likely come up with splits in the near future. Usually, experts suggest that stock splits should likely occur when a company is grossly overvalued or concentrates its bulk volume of shares in the hands of promoters compared to regular retail investors from the public. Here are some companies that may call for splits as they possess outstanding shares:
What’s good about a split?
Does any real good come out of a stock split? It may not be a big deal if a stock splits and you already hold a company’s shares. However, for achieving liquidity in the market, giving other small investors opportunities to buy the shares, stock splits are great. There may be a decrease in a company’s share price following a split, and this is the moment of truth - to invest in it. The value of a good stock can just as easily rise again if it is held on to for the longer term. When you open a demat account, you should consider investing in a company that is about to split its shares. While splits are not common in any upcoming IPO after it gets listed, this may be the case later on as the company expands and grows.
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