When a company is concerned that its share price is
too high or too low, it can opt for a stock split or a reverse stock split. A
stock split can help a company lower its share price to appeal to new
investors, while a reverse stock split can boost its share price and help
preserve its listing on a major stock exchange.
What Is a Stock Split?
A stock split is when a company’s board of
directors’ issues more shares of stock to its current shareholders without
diluting the value of their stakes. A stock split increases the number of
shares outstanding and lowers the individual value of each share. While the
number of shares outstanding change, the overall market capitalization of the
company and the value of each shareholder’s stake remains the same.
Say you have one share of a company’s stock. If the
company opts for a 2-for-1 stock split or Stock Split From Rs.10/- to Rs.5/-, the company would grant you an
additional share, but each share would be valued at half the amount of the
original. After the split, your two shares would be worth the same as the one
share you started with.
What Is a Reverse Stock Split?
A reverse stock
split reduces a company’s number of shares outstanding. If you owned 10 shares
of a stock in a company, for example, and the board announced a 2-for-1 reverse
stock split or consolidation of stock From Rs.5/- to Rs.10/-, you’d end up with five shares of stock. The total value of your
shares would remain consistent. If the 10 shares were valued at Rs. 400 per share
before the reverse split, the five shares would be valued at Rs 800 per share after
the reverse split. In either case, the total value of your investment remains
Rs. 4000.
Why Do Companies Split their Stock?
In many cases, a
stock split is a strategy used by companies to meet a specific goal of making it more affordable to investors for investing. So, as a result, it increases the liquidity in the stock.
Companies often like
the idea of creating more liquidity by making a price more attractive and
attainable for a larger number of people. You might not be able to buy Eicher Motors Ltd. (NSE:EICHERMOT) at Rs. 20000, but you could buy it at Rs. 2000.”
On the other hand, a
reverse stock split is often aimed at helping a company meet the minimum
requirements to remain listed on an exchange.
Listed company can get kicked
off an exchange if your price drops too far. A reverse stock
split consolidates your shares in a way that results in a higher per-share
price that can keep you trading on a public and accessible exchange.
This helps ensure
more people can access the shares and keeps existing shares liquid.
While a reverse stock split is often thought of as a red flag for investors, in
the long run, it can help a company survive and recover from a rough patch.
What Is a Stock Split from the face value of 10 to the face value of 5?
A stock split from the face value of 10 to the face value of 5, grants you two shares for every one share of a company you own. If you
had 100 shares of a company that has decided to split its stock, you’d end up
with 200 shares after the split.
A stock split from the face value of 10 to the face value of 5, stock split from the face value of 5 to the face value of 1, stock split from the face value of 10 to the face value of 2 are relatively common.
How Does a Stock Split Affect You?
Because a stock split doesn’t change the underlying value of your investment, you may not notice any more substantial changes than the number of shares in your investment account.
There’s no
particular advantage for those who already have shares.
Nothing
about ownership is going to change. You might have twice as many shares, but
they are at half the price, so it balances out.
For those who aren’t
already shareholders, though, a stock split can provide motivation to buy. For
example, if you couldn’t afford a share of GOLDIAM INTERNATIONAL LTD. before its recent stock split,
you might be able to get one now.
The ability for more
people to buy a stock can bump up its price, which in turn may actually
increase a company’s value, at least temporarily.
With more people
able to buy, you see more demand, and the price can go up. If you have more
shares, this can be beneficial to you if you hold on. However,
that stock and total value bump is generally temporary. To see long-term gains,
you usually need to keep holding that stock to get the benefit over time.
Are
Stock Splits Important with Widespread Fractional Share Investing?
As fractional
investing becomes more popular and widespread, some experts
speculate that stock splits will become less important as fractional shares
allow you to buy into a company at virtually any price point. This is not yet applicable for Indian markets. We can not hold shares in fractions as per exchange.
Currently, investing
apps like Robinhood, Stash, M1 Finance and SoFi Invest, as well as legacy
brokerages like Charles Schwab and Fidelity, allow clients to buy fractional
shares of certain stocks and
exchange-traded funds (ETFs) in American markets.
It’s hard to say
how fractional investing will impact investing and stock splits since there
isn’t a lot of data right now. But I think it will take
significant time before fractional investing eliminates the need for stock
splits.
And that’s not even considering the psychological aspect of stock
splits. Humans love a round number. There’s something about knowing you have
the money to buy a full share that motivates many investors.
Difference
between Bonus issue & Stock Split
A bonus issue is an additional share given to existing shareholders
while a stock split is the same share divided into two or more as per the split
ratio. Bonus shares are benefiting to existing shareholders while both existing
shareholders and potential investors can benefit from the stock split.
If the company goes for a stock split from the face value of 10 to the
face value of 5. The number of stocks will get double and the price will get
adjusted, whereas in bonus face value remains the same but the price will get
adjusted in proportion to the bonus ratio.