What are Stock Splits?

by khalid on 12/09/2011 · 1 comment

Stock splits occur when there is a structured release of the shares of a company and such that the shareholders equity is not being decreased.

If one were to explain with an example, one can see that in case of a 2:1 stock split, each shareholder that owns say, 100 shares of say Rs.1000 each, shall own, after such split, 200 units of the same stock but the value of each share shall fall to Rs. 500 for each share.

The most common types of stock splits are 2:1 but this does not mean that other splits are not possible. A company can also have 3:1 or 5:2 stocks please as per their requirements.

The primary reason behind these stock splits on either NSE or the BSE, by a company, from the management’s perspective is to bring down the abnormally high prices of their stocks and make it more affordable for the wider group of traders and hence increase trade volumes. The other reason behind stock splits is to infuse liquidity of their stocks within the system. Increase in trade due to affordability of the stock is also responsible for higher volatility of the stocks and the gains & drops of the stocks prices also become more pronounced.

It is generally believed among most investor groups that stock splits on both NSE and BSE result in benefits to the investors but the idea is wrong. Each share post split represents half value of what it actually was despite the increase in the number of shares. Henceforth, each share shall be entitled to half amount of dividend, earnings and assets than it initially was prior the split.

 

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