If you have been a regular at the stock market, then stock split may be a common phenomenon for you. But even if you haven’t heard much about it, you don’t have to worry much as we’ll let you know all there’s to know about stock split. Let’s find out more about it down below.
What is stock split?
Stock split refers to the process of dividing the existing shares of the company into multiple shares. As the name suggests, it’s about splitting the shares of the company. This is done in order to boost the liquidity of the shares although the total capitalization of the company remains the same. This is a common practice among the companies as it helps to increase the liquidity of the company. Normally, the stocks are split in the form of 2 for 1 or 3 for 1. For say, if the company has 10,000 outstanding shares and it opts for share split of 2 for 1, then the outstanding shares will now become 20,000. Similarly, any existing shareholder who holds for say 1000 shares will now have 2000 shares after the stock split.
Why do companies perform stock split?
As we mentioned above, the major reason why companies perform stock split is to increase the liquidity of the company. For say currently the price of a share is Rs 100 and the company opts to split it in 2 for 1 condition that makes one share of Rs 100 turn into 2 shares of Rs 50 each. When the stocks are split, people venture into the market and trade-off the shares. This will also create a wave of buying and selling which will increase the liquidity for the company. Sometimes, the share prices of companies tend to be too high for the liking of the potential investors, so they reduce the cost of the share by splitting them. That makes them accessible to invest in for any potential investor and renews the interest for any investor.
Will stock split affects your investment portfolio?
If you look at the concept of the stock split, the market capitalization of the company remains the same and only the number of shares tends to increase. For say, if you hold 100 shares of a company of Rs 100 each in your portfolio and the company splits its shares as 2 for 1 then now your shares will become 200 shares of Rs 50 each. This won’t change the value of the investment in your portfolio but will change the number of shares you’re holding of that company.
But the catch is when such stock splits occur, it is deemed that the company wants to attract the investors via lowering the price of shares and making it accessible. This will bring in a wave of interest and potentially make the company a top choice for investors. That will bring a swell in your value of the investment in the long run. In fact, if you were to trace the history then companies that have performed stock split have gone onto give better returns in comparison to their counterparts.
When stock splits are done, the number of stocks in your portfolio tends to increase which in turn may change the asset allocation in your portfolio as the equity part will swell high. This is where you can take a look at your portfolio and revisit the asset allocation ratio. And if you want you can rebalance it accordingly so that your asset allocation is in line with your investment goal.
What are reverse stock splits?
Reverse stock split as the name suggests is the reverse of what stock split it. This is where the company consolidates the shares and performs the reverse stock split. For say, you hold around 1000 shares of Rs 10 each and the company decides to perform a reverse split of 1 for 10, then your shares will be reduced to 100 from the initial 1000. However, the value will also change from Rs 10 for each share to Rs 100 for the new share. That way your valuation won’t change but the number of shareholdings will change.
Why do companies perform reverse stock split?
Companies tend to perform reverse stock split to increase the price of the stocks. Sometimes the shares of the company may trade at a lower price which may create a bad impression on the investors. So they end up doing a reverse stock split to help increase the value of the shares and renew the interest among investors.
Will reverse stock split affect your portfolio?
When it comes to reverse stock split, the market capitalization of the company remains the same as it is but the major change is in the number of shares. The number of shares tends to decrease with the reverse stock split. For say, a company had 10,000 outstanding shares and opts for a reverse split of 1 for 10, and then the outstanding shares will now be only 1000. However, the share prices will increase for the shares.
There are plenty of companies who have gone this route and prospered after reverse stock split while some have also faltered down the line. It depends on the market volatility and the size of the firm whether the reverse stock split affects your portfolio or not. When the reverse stock split happens, your asset allocation changes course and it would be wise to have a look at your portfolio during this. Take a look at your investment portfolio and see whether you need to rebalance it to get it in line with your initial investment goal.
Should you invest in a market after a stock split or reverse stock split?
This is a question that tends to float around whenever there’s a split or reverse stock split in the stock prices of any company. Encashing on these momentums is more about trying to book quick profits which in terms of investment is not something you should aim for. Investment is about seeking the best opportunity to help your wealth grow and it takes time. When you want to invest in the market, the best thing you should do is to do the fundamental analysis and see if the stocks fit into your desired criteria or not. Once you are aligned on your goals, these stock splits or reverse stock splits will not impact your investment ideology. See if the company is fundamentally strong or not and then you can invest in it regardless of stock split or reverse stock split.