Skip to main content

What is Stock split and How does it effect you?


What is a stock split?

A STOCK split is an increase in the number of outstanding shares in such a way that the proportionate equity of each shareholder remains the same. So if a firm has a capital of Rs 10 crore, with 1 crore shares, each with a face value of Rs 10, and when this firm opts to split its shares into a face value of Rs 5, then it would issue 2 shares, against 1 share held by each shareholder. The firm will now have two crore shares, with a face value of Rs 5, and its equity capital would be the same at Rs 10 crore.

What happens to the price?

Once a company decides to split its shares, it calls for a book closure. Post the book closure, the stock price falls to the same extent as the split. So if the stock was trading at Rs 200, before the split, post the split, it would trade at Rs 100 per share. However, the market value, or market capitalisation, which is the number of shares multiplied by the market value of the stock, would not change and remain the same.

Why does a company split its stock and what approvals are needed?

One reason as to why stock splits are done is that a company's share price has moved so high that it is difficult or expensive for people to buy in round lots. So for example, if ABC company's shares were worth Rs 1,000 each, an investor would need Rs 1 lakh to invest in 100 shares. If, however, the company splits its share in the ratio of 10:1 and the price was Rs 100, you would need a mere Rs 10,000 to buy 100 of these shares.


   Recently, HDFC has opted to split its shares in the ratio of 1:5. Also, Tata Tea has decided to split its shares into face value of Re 1 from the earlier face value of Rs 10. Any stock split can be done only with the approval from the board of directors and shareholders. Once the approval is obtained, the company can call for a book closure and split its shares.

What is a reverse stock split

A reverse stock split, or reverse split, is the opposite of a stock split, i.e. a stock merge — a reduction in the number of shares and an accompanying increase in the share price. There are many institutional investors and mutual funds, who have rules that forbid them from purchasing stocks which quote below Rs 10, as they feel the stock may be manipulated or belongs to the penny category. Every professional company management likes to have a broad-based shareholding.


   Hence to attract such investors, a company could go for a reverse stock split, where the ratio is reversed namely 1-for-2, 1-for-5 and so on. However, some firms also use a reverse stock split as a tactic to reduce the number of shareholders or avoid getting delisted. However, this is not as commonly used as stock splits. Earlier this year in March, LG Balakrishnan and Bros went in for a reverse split to consolidate the share's face value from Re1 to Rs10.

 

Popular posts from this blog

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

EPFO can pay 8.5% interest in 2009-10

THE Employees’ Provident Fund Organisation can comfortably offer 8.5% interest rate to its 4.41 crore depositors during 2009-10 and still record a surplus contrary to Rs 139-crore losses suffered by it for giving the same benefit during the current fiscal. The issue of return to the depositors would be discussed at a meeting of the ‘finance and investment committee’ (FIC) on Thursday, agenda for which lists that maintaining an 8.5% interest could still give the fund a surplus of Rs 6.4 crore on the investment made by the fund. If EPFO maintains the interest rate of 8.5% on PF deposits, there will be a surplus of Rs 6.4 crore at an estimated income of Rs 12,994 crore in 2009-10. In case the interest is raised to 8.75%, the fund would suffer a loss of Rs 366.77 crore and the deficit would be still higher at Rs 739.94 crore if the rate of interest is fixed at 9%. FIC gives recommendations on financial matters to the apex EPFO body Central Board of Trustees (CBT), which takes the final ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now