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Stock split

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Is Stock Split a good idea?

First of all, lets see the definition of stock split.

Stock split is

.. the issue of new shares in a company

.. to existing shareholders

.. in proportion to their current holdings.

As u can see, new shares will be created because of the stock split

By saying new shares will be "created", it will make changes to the capital account of the company.

But market cap remains the same

Yes. Yet Market cap remains the same!

Lets try to understand this with an example

Assume a company has 1 lakh shares @ Face value of Rs. 10

Now, company decided that to go for a stock split in the ratio 1:1

This means, for every 1 share held in demat, the investor will get an additional share

Since new shares are created, the face value has to be changed as well

So Face value becomes 1/2 of Rs. 10 = Rs. 5

Now, according to company books, the holding will be 2 lakh shares @ Face value of Rs. 5

With this, 2 lakh shares are now in the market.

Which means, more trading and investing opportunities.

And this will increase the liquidity of the company shares.

So, in a way, stock split is a good thing.

saves on the commissions/brokerages also... earlier it was more advantageous but with current zero brokerage for delivery by some brokers... that's not the case anymore

So, in a way, stock split is a good thing.

Average price determination after stock split

Generally most investors take the average price based on the ratio of the split.

For serious tax computation and official reasons, the company will issue a press release for the fair price of the share post the split.

Search for the release on stock exchange website.

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