Stock split 2024: meaning, benefits and examples (2024)

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OfAmerican Yankee legend Yogi Berraonce said"You better cut my pizza into four slices because I'm not hungry enough to eat six."However, the taste of the pizza remains the same no matter how many slices you cut it into, right? This is essentially what a stock split means.

Whether you're a seasoned investor or just starting out in the financial world, let's start with the basics. In this blog post we discuss what they are, why companies share them and how they can influence your investment strategy.

Let's start to demystify this essential concept. ischolarship, shall we?

What is a stock split?

Split share means a corporate action that allows a company to split and divide its existing businesssharesto several new shares, with each investor's share and market value (the total value of the common shares owned by an interested party) remaining unaffected.

A company splits its shares using a specific split ratio to determine how many shares it will be split into. The stock split can be in the form of a forward or reverse stock split.

Let's understand this concept with an example. Let's say you invested in company X. Now the company has announced a 2:1 split with ashare priceof Rs.100 and you go from having Rs.100 shares for one share to two shares of Rs.50 each. Here, the stock split effect has no impact on the overall market value. This is an example of a forward split where the investor received two shares at a lower price.

Upcoming stock splits in 2024

Wondering if you should invest in companies that have announced stock splits?

'Tis the season, my friend.

We've compiled a list of companies that have announced their stock splits before February 2024. See the table for better understanding.

Please note that the above list is for educational purposes only and is not recommended. Do your own research or consult your financial advisor before investing.

Remark: The data on the upcoming stock split in India is as of February 14, 2024. However, for real-time updates on stock prices and market trends, please visitcollection of small boxesToday!

How does a stock split work?

Meghan Railey, a certified financial planner and co-founder of Optas Capital, remembers the stock split'when a company wants to change per share prices and at the same time make the shares more accessible to people.'Existing shareholders receive additional shares when a company issues them, increasing their total number of shares by a specified distribution ratio, i.e. usually 2:1 and 3:1. Companies choose to split their shares to lower their stock trading prices and provide investors with a more affordable offering.

Many investors would like to invest in 100 shares of Rs.1000 stock instead of buying one share of company 1000. So the board of directors of a company decides to implement a stock split when stock prices rise. The board can choose any split ratio, such as 2:1, 3:1, 5:1, 10:1, or 100:1, etc. A 3-to-1 represents that for each share you own in Company , will you own three?

Why do companies split shares?

It also indicates that a company is flourishing, which is a good thing, but management decides to split its shares because they believe their stock prices are relatively 'high' or above the 'optimal' trading range for shares. As a result, companies may do this to make their stocks more attractive to investors.

An example of a stock split, Amazon Inc. completed the famous 20:1 stock split on June 3, 2022. This means that any investor who owns at least one share of Amazon Inc. will own 20 shares until May 2022. On 3 2022, before Amazon went into demerger, each share was trading at Rs. 2,447; after the split, each share stood at Rs.122.35. However, another 19 shares were added to the investordemat-account.

What happens when a share is split?

One of the main benefits of stock splits is that it makes a company's stock cheaper for novice or low-risk investors.

Although stock splits can be beneficial because they increase the number of shares outstanding during the split, the overall dollar value price remains the same because stock splits do not add real value. When a split is implemented with a specific split ratio, the price of a stock is automatically adjusted in the market on the stock exchanges (such as NASDAQ, NYSE, BSE, NSE, etc.).

Example:

Let's walk you through a classic example. Suppose Company A has ten thousand outstanding shares available at Rs.60 per share. stock. The board of company A announced a 2:1 stock split.

Two investors, Tara and Lara, had a stake in the company before the split was announced. Tara owns 6% (or 600) and Lara owns 2% (or 200) of the outstanding shares. When the split was announced, Company A immediately increased the number of shares outstanding. So now both investors owned twice the outstanding shares, ie. 20 thousand.

So after the split, Tara owns 1,200 shares with a 6% ownership interest, and Lara owns 400 shares with the same 2% ownership interest.

(Note: When existing shares are split 2-for-1, their price is roughly halved, so even though there are 100% more shares, each has 50% less value.)

Factors that can influence investors during a stock split

Now let's look at some factors that can influence investors.

• Changes in the number of shares held: When a company conducts a stock split, the number of shares an investor owns changes, but the total value of their investment remains the same. This means that the investor's ownership interest in the company remains the same, but the number of shares he owns and the price per share.
• Effects on the stock price: A stock split can temporarily affect a company's stock price. In the case of a stock split over time, the price per share decreases proportionately. This makes the stock more affordable for investors and increases demand.
• Impact on the value of an investment: As mentioned earlier, a stock split only changes the number of shares held and the price per share. The total value of the investment remains the same, assuming no other changes in the stock price.

• Tax consequences of a stock split: Because the total value of the investment remains the same, there is generally no immediate tax liability as a result of a stock split. So the cost basis of each share is adjusted accordingly, which can affect the calculation of capital gains or losses when the shares are sold.

Types of Stock Splits

There are two main types of stock splits that companies can use to increase the number of shares outstanding. Let's understand it together.

What is a forward stock split?

A forward stock split is the most common type of stock split. In this type of split, a company increases the number of shares outstanding by dividing each existing share into more shares. For example, a 2-for-1 stock split splits each existing share into two new shares. As a result, the total number of shares outstanding is doubled, but the value of each share is halved

Before the split:

After a 2-on-1 split:

What is a reverse stock split?

This is the opposite of a forward stock split. In this type of split, a company reduces the number of shares outstanding by combining multiple shares into one share. Let's understand it through an example of a reverse stock split. For example, a 1-for-5 reverse stock split combines every fifth share of existing stock into one new share. This reduces the total number of shares outstanding by a factor of five, but increases the value of each share proportionately.

Before reverse splitting:

After reverse division:

How do stock splits affect short sellers?

Contrary to what you might expect, stock splits generally do not have a significant impact on short sellers in terms of their overall position or potential profit/loss. However, there are some adjustments that occur as a result of the split:

Changes in position

• Number of shares: After the split, the short seller will be owed a proportionately greater number of shares than before. For example, a 2-for-1 split of 100 shorted shares would result in owning 200 shares after the split.

• From the price: Conversely, the price per share will decrease in proportion to the split ratio. In the same example, Rs. 100 per The share price would fall to Rs. 50 after the split.

Impact on profit/loss potential

• Total value: It is important that the total value of the short position remains the same before and after the split. In the example, the short position was worth Rs. 10,000 before the split (100 x Rs. 100) and remained at Rs. 10,000 after the split (200 x Rs. 50).
• Closure of costs: Although the position value remains unchanged, the cost of closing the short position may change depending on the price movement after the split. If the price continues to fall, the short seller can benefit from buying back the shares at a lower price. However, if the price rises, the cost of closing the position will increase, reducing potential profits.

Is a split good for a stock?

Stock splits are generally neither good nor bad. A stock split is ta placewhen companies want to make their shares look more attractive so that investors can buy them. However, as mentioned above, it is usually a good sign that the company is growing and open to future growth prospects.

Should you invest in a stock after a stock split?

Before 1999, SEBI allowed only two denominations: Rs. 10 and Rs. 100. Nowadays, the split ratio for different companies can vary, such as 2:1, 10:1 or 5:1.

Recent studies suggest that there has been a negative effect on welfare following stock split announcements after 1999, refuting the signaling hypothesis. However, a survey of the 30 largest companies between 2001 and 2010 found that exactly half of stock splits led to positive returns in the one-year period after the event. The other shares, on the other hand, delivered a negative return. Another analysis rejects the trading range hypothesis, as most stock splits are announced for stocks that are already trading at low prices.

The impact of stock splits among investors

Once a split is announced and implemented in the market in a specific split ratio (including reverse splits such as 1:3 or 1:2), it will not affect your investment value. However, if the company pays a cash dividend to its existing shareholders, it will also issue a record date.

As indicated in the example above, Tara and Lara will have the same stake in Amazon Inc., 6% and 2% respectively, regardless of the stock split.

But in the long run, it is always advisable to invest in a stock portfolio rather than one stock, because why look for a needle when you can have the whole haystack?

What are the advantages of a stock split?

Splitting shares of a company can provide several benefits to both the company and its shareholders. Here are some of the top benefits of stock splits:

• Increases liquidity:A split increases the number of shares outstanding and can increase the stock's trading volume. This increased volume of shares traded can increase liquidity and make it easier for investors to buy or sell the shares.
• Attracts new investors: A lower share price after a split can make the stock more accessible to a wider range of investors who the high price previously deterred. This could increase demand for the stock and attract new investors, which could drive up the share price.
• Improves perceived affordability: A stock split can create a perception of affordability among investors. For example, some investors may see a company's shares trading at Rs.1,000 per share. sharing, as unaffordable. However, after a 2-for-1 stock split, the shares of the same company will trade at Rs.500 per share. sharing, making it more accessible to investors.

• Increases market value: A stock split can result in more shares outstanding, increasing the company's stockmarket value. This may attract institutional investors who may previously have been unable to invest in the company due to its low market capitalization.

What are the disadvantages of a stock split?

While a split can offer several benefits, there are also some potential disadvantages to stock splits that companies and investors should also consider. Here are some of the main disadvantages of a stock split:

• No change in enterprise value: A stock split does not affect the underlying value of a company. The company's market capitalization, earnings and fundamentals remain unchanged before and after the split.
• Volatility: A stock split can increase the stock's volatility, leading to wider bid-ask spreads and higher volatility for short-term traders.
• Perception of financial problems:In some cases, a company splitting its stock can be seen as a sign of financial trouble or a lack of confidence in the company's future performance. This perception can negatively impact the stock price and investor sentiment.

Example of stock split

Let us take an example of a company X where the initial share price is Rs. 1,400 and the split ratio is 2:1.

Before the split:

• An investor owns 10 shares of company X at Rs. 1,400 pcs.
• Total Investment: 10 shares x Rs. 1,400/share = Rs. 14,000

After the split:

• For each existing share, the investor receives 2 additional shares, resulting in a total of 10x 2 shares = 20 shares.
• The stock price is adjusted to reflect the split ratio and becomes Rs.1,400/2 = Rs. 700 per share.
• The investor's total investment remains the same: 20 shares x Rs. 700 = Rs. 14,000

Are stock splits important in widespread stock investing?

As fractional investing becomes more popular and widely adopted, some experts speculate that the importance of stock splits may diminish because fractional shares allow investors to buy into a company at virtually any price.

According to Holden, assessing the impact of fractional investing on stock splits is challenging due to the limited data available. He notes, "It is challenging to predict how fractional investing will affect the need for stock splits, but I think it will be a long time before fractional investing completely eliminates this need."

The psychological aspect of stock splits should also not be overlooked. Holden emphasizes that the human preference for round numbers comes into play, saying: "Investors are often motivated by the satisfaction of knowing they have the resources to purchase an entire share."

What is a shopping cart order?

A basket order is a type of order that allows you to buy or sell multiple securities at the same time. Think of it as a shopping cart for your investments. You can add several stocks, bonds or other assets to your shopping cart and then place the order in one go.

To finish…

In conclusion, we can say that in the event of a stock split, each investor's share and market capitalization remain unaffected. So a stock split will not affect your bet, but it will affect your shares if you buy before or after the split.

Therefore, it is better to invest in a block of shares at small case levels or do portfolio investing, where our top analysts recommend portfolios that reflect your interests. With just a few clicks you can do thatcreate, share and track your small casewith friends and family. Is not that great?

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