Everything to know about Stock Splits

Investing in the stock market can be both exciting and confusing, especially for beginners. One of the common occurrences in the stock market is a "Stock Split," which can influence the way investors perceive and trade a particular stock. In this blog, we will take a closer look at Indian stock splits, along with a simple example to help you grasp this concept easily.

What is a Stock Split?

A stock split is a Corporate Action taken by a company to increase the number of outstanding shares while proportionally reducing the stock's face value. The total value of the company remains the same, but the number of shares increases. Stock splits are usually carried out to make the stock more affordable for retail investors and increase liquidity in the market.

Example of a Stock Split with Face Value Change:

Let's understand this with an example:

Company XYZ has a total of 1,000,000 shares outstanding, and the face value of each share is Rs. 10. The market price of each share is Rs. 100.

1. Stock Split Ratio: The company announces a 1:2 stock split. This means for every 1 share an investor holds, they will receive 2 additional shares.

2. Face Value Change: After the stock split, the face value of each share is reduced proportionally. In this case, the new face value will be Rs. 5 (Rs. 10 divided by 2).

3. Calculation: If an investor owns 100 shares of Company XYZ before the split, they will now have 100 shares x 2 (split ratio) = 200 shares after the split. The face value per share will be Rs. 5.

4. Market Price Adjustment: Since the stock split only changes the number of shares and face value, the market price of each share will be adjusted accordingly. In this example, the market price should be halved. Therefore, after the split, the market price will be Rs. 100 divided by 2 = Rs. 50 per share.

Impact on Investors:

Stock splits have no direct impact on the total value of an investor's holding in the company. In our example, the investor had 100 shares valued at Rs. 10,000 before the split (100 shares x Rs. 100 market price). After the split, they will have 200 shares valued at the same Rs. 10,000 (200 shares x Rs. 50 market price).

The main benefit of a stock split is that it increases the liquidity of the stock in the market. More affordable shares can attract new investors and potentially increase trading volumes.

Conclusion:

Stock splits are a common occurrence in the Indian stock market, and they play a role in making shares more accessible to investors. Remember, while stock splits may change the number of shares and their face value, they do not alter the total value of your investment. As an investor, it's essential to stay informed about such Corporate Actions and understand their implications on your investment portfolio. Happy investing!

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Frequently Asked Questions.

What happens to my demat account when a stock undergoes a split? When a stock undergoes a split, it may take up to two working days from the ex-date/record date for the new shares to be credited to your demat account. During this time, the new shares won't be visible in your demat account.

Will the stock split affect my Profit & Loss (P&L) statement? Yes, the stock split may temporarily impact your P&L statement. Since the number of shares has increased due to the split, the earnings per share (EPS) might appear artificially decreased. Similarly, losses might seem to increase until the new shares are credited to your account.

How long will the P&L statement show this artificial decrease in profits or increase in losses? The impact on the P&L statement is temporary and lasts until the new shares are credited to your demat account. As soon as the new shares are reflected in your account, the P&L statement will automatically adjust, and the actual profit or loss will be displayed.

Do I need to take any action during this period of adjustment? No, you don't need to take any action during the adjustment period. The process is automated, and the stock split's impact on your P&L statement will be automatically rectified once the new shares are credited to your demat account.

Will the stock split affect the overall value of my investment? No, the stock split does not change the overall value of your investment. The total value of your investment remains the same even though the number of shares has increased, and the face value of each share has decreased.

Can I sell the new shares immediately after they are credited to my account? Yes, once the new shares are credited to your demat account, you can sell them if you wish.

What should I do if I still can't see the new shares in my demat account after the adjustment period? If you face any issues with the new shares not being credited to your demat account after the adjustment period, you should contact your stockbroker or depository participant for assistance.