What do you mean by Stock Split ?

A Thread

1/ When a company announces a stock split the number of shares of that company increases but the market capitalization remains the same. This is because the market price of the stock also decreases in the same ratio.

2/ The most common reason for a stock split is to make it affordable for retail investors. Many times the price of good performing stocks rises very high and owning even a single share in that company gets out of reach of retail investors.

3/ Here the concept of stock split plays a vital role. A company announces a stock split by issuing more shares to the existing shareholders and thus brings the price of the share down. Remember this does not impact the value of shareholding.

4/ We can take an example to make things clear. Very recent example is of Eicher Motors in India. Single share of the company was trading at ₹21,702.50 (closing price) on 21 Aug 2020. Company had announced a stock split and the ex-date was 24 Aug 2020.

5/ Now, the face value of the share was ₹10 earlier and post split it was going to be ₹1. Here the ratio was 10:1, someone holding 10 shares of Eicher Motors on 21 Aug had 100 shares on 24 Aug. The opening price on 24 Aug was ₹2,199.45 up 1.35% from previous close.

6/ Since the number of shares rose by 10x the price got divided by 10 and hence no change in the value of shareholding or market capitalization took place. But in effect it became affordable for a person in case one is interested in buying 1 share of the company.

7/ On 24 Aug pre split it would have cost ₹21,994.50 and post split its cost was ₹2,199.45.

8/ There are many more examples like this here in India and US markets as well. Very recent examples of stock split in US markets are Apple Inc and Tesla. The purpose is the same there as well to make it more affordable and make it appealing to the masses.

9/ One difference is that in the USA the concept of face value is different for stocks. There the face value is replaced by the original cost at which the stock got listed.

10/ So slight change is that here in India when we talk about split its the face value split and in USA its just stock split.

11/ Some people confuse stock split with bonus shares as in that also the no. of shares go up and the price gets adjusted by getting lower in the same ratio. But one major diff is that the face value split the authorised capital & in bonus shares the issued capital gets affected.

To know the concept of Bonus shares and how its effect on stock prices, checkout the following https://twitter.com/FinsenseG/status/1291592446086770688?s=20

12/ Many times we see prices of stocks rising immediately after a split takes place. The reasons could be affordability, high volumes or pure speculation. But one should keep in mind that in effect it has no bearing on the financials or performance of the business.

13/ So, to conclude stock split has its uses as it makes a stock affordable and provides more flexibility and liquidity in buying or selling of the shares in the market. But buying or selling just on the basis of this corporate action is not the right way of investing.

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BY :- @harindersnanda

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