Skip to main content

Making sense of stock split: No money, only numbers

 

 

 

Aboun 50 listed companies have initiated the corporate action of stock split, the market term for dividing an existing share into multiple units. As an investor, should you invest in a stock before or after it is split? Stock splits immediately result in a rise in the number of outstanding shares by a specific multiple.

But the total value of the shares remains the same as no real value is added as a result of the split.

For instance, in a 1:5 stock split an investor will own five times the number of shares she originally owned and the company will have five times the number of shares outstanding. Stock split also leads to a rise in trading volume, as the stock 'appears' cheaper, and a drop in volatility on the counter.

The problem is, the market tends to react to a stock split decision with a lot of euphoria and common investors show the tendency to fall for it.

Retail investors seem to believe a stock split is a positive development. Even though there is no effect on the company's fundamentals, people believe in the myth that the stock price will move up and attain the pre-split level quickly. But in reality, the only effect it has is that it leads to a rise in trading volume.

A price analysis of the stocks that have been split in recent times suggests some stocks did show an upward trend following the announcements. In some cases, the stocks even touched 52-week highs. For instance, shares of Astral Poly Technik hit Rs 234 on May 24 after the company's board recommended a 2for-1 stock split at the time of announcing its March quarter results.

In other cases, the soon-to-be split stocks saw price appreciation even when the broader market fell.

This happened on the counters of Ram Ratna Wires, South Indian Bank, English Indian Clays and Bodal Chemicals, where the stocks rose between 10 to 21 per cent since the time a stock split was first proposed. The Sensex fell between 5 to 7 per cent in the same period.

The bullish trend in the prices (for stocks that announce stock split) usually remains only till the record date.

But there were also cases like Farmax, where the stock fell 11 per cent (till May 27) since the time of announcement (May 11) of a probable stock split. Sensex has fallen only 5.5 per cent in the same period. Bain Capital-backed Himadri Chemicals has lost over 4 per cent (since May 18 till May 27)) while Sensex has lost just 1 per cent.

Stock split may not be the only reason for the apparent out-performance or under-performance of these counters. There could be important fundamental factors such as results or technical factors such as resistance levels.

Why do more and more companies go for stock split?


Stock split makes a counter look cheaper and, hence, it becomes more liquid. While `cheaper' stocks are more popular with retail investors, higher liquidity on a counter tends to draw institutional investors. Stock split can have a positive impact on prices if the counter generates good interest among FIIs, who may have been avoiding the stock earlier due to lack of liquidity.

Also, as long as there is no corporate governance issues, a counter tends to perform better compared with its peers after a stock spilt. But investors should be beware of case where the track records of the promoters are not very clean, specially companies in the B2 and Z category stocks of BSE. In such cases, investors should avoid the temptation of buying these stocks.

At the peak of bull run in 2007, a large number of companies with dubious track records used this carrot of stock split to attract gullible investors. They were left high and dry when the market crashed in early 2008. Also, one should avoid stocks that have been re-listed after a long gap and then a stock split or a bonus issue is announced. This could just be a trap of market makers.

As an investor, if you are entering a counter because of a stock split, be ready to hold it for the long term.


Because a rise in liquidity and lower impact cost are some of the factors that can get a higher multiple for a stock, but that happens only in the long run. There are over 80 stocks on the BSE that have market prices over Rs 1,000. Shares of MMTC, Dalal Street Investments, MRF, Bombay Oxygen, Ravalgaon Sugar, Veritas (India), Crisil and Tide Water Oil are quoting at over Rs 5,000 a share.


Some of these may go for stock splits in future. On May 27, Britannia announced 5-for-1 split for its shares trading at Rs 1,690 apiece.

There is no tax implication in a stock split. A stock split is tax neutral. When the shares are sold, the capital gains tax implication is different from what is applicable to bonus issues. In case of a split, the original cost of the shares also gets reduced.

If an investor bought 100 shares of a company at Rs 1,500 a share, and if the company goes for a 1:5 stock split, the share price will get reduced to Rs 300, thereby keeping the total cost constant at Rs 1,50,000.

 


Popular posts from this blog

What are the factors affect the changes in Interest Rate of Fixed Deposits?

  What are the factors affect the changes in rate of Fixed Deposits? Fixed Deposits are now considered to be a very old fashioned method of saving, but still attract many investors since they have guaranteed returns at the end of the tenure of the investment at a decent interest rate. There are various factors that affect the rates of interest for a Fixed Deposit. Policies of the Reserve Bank of India   - The several norms and restrictions posed by the Reserve Bank of India , in order to gain optimum control over credit and inflow and outflow of fund throughout the country. The repo rate changes, cash reserve ration tends to change and these changes affect the banking products like Fixed Deposits, loans etc. Recession   - When unemployment in a country crosses the benchmark set Recession hits, and slowly the country faces an economic slow movement, affecting the purchasing power of the people in the country, forcing the Reserve Bank of India to release more funds in the financial marke...

Understanding Your Cibil Credit Information Report

   WE ARE all familiar with the anxiety and uncertainty that we feel when applying for a loan. After all, it's the lender who decides whether we can own our dream home, our first car, or whether our children can pursue higher education. In a nutshell, a better life depends on the lender's decisions.    While other factors do play a part in the lender's decision, the Cibil Credit Information Report ( CIR ) plays a crucial role in a lender's decision to approve a loan application.    Previously, lenders would treat all loan seekers equally. Each applicant, if approved by the lender's internal credit policy, would be charged at the same interest rate for a particular loan size and purpose. The lenders would charge a higher interest rate to all the borrowers, in order to compensate for the possible default of a small portion of the loan disbursed. In other words, it's like a professor (the lender) punishing an entire class (borrowers) for the mischief played b...

Capital Protection Oriented Funds

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   Capital Protection Oriented Funds   Erosion of capital is one of the key concerns for investors wanting to invest in equity mutual funds. To address this concern, asset management companies have launched Capital Protection Oriented Funds (CPOFs). What are CPOFs? CPOFs are generally three to five-year, closed-ended funds where 70-80% of the portfolio is invested in fixed income securities, which mature on or before the scheme's tenure. The investment in fixed income securities grows to 100% at the end of the tenure, providing the investor with capital protection. The remaining portion (20-30%) is used to take exposure to equity, which provides the upside. Exposure to equities is either by directly buying equity stocks (plain vanilla CPOFs) or by b...

Mutual Fund Review: ING Dividend Yield

  ING Dividend Yield's small assets enable the fund manager to churn in impressive returns… Strategy The aim of the fund is to invest in stocks which offer a high dividend yield. This fund deploys a value based strategy which aims to gain from investing in fundamentally strong and free cash flow generating businesses. The scheme focuses not only on growth but also on the cash generated by the business, which mostly leads to stable returns even in volatile markets. This fund has a low volatility because of its investment in high yielding stocks. The scheme tries to include stocks that yield dividend above the dividend yield of the Nifty and stocks with liquidity, which throws up a universe of 150 stocks.   Our View Launched in October 2005, this fund invests at least 65 per cent of its assets in high dividend yield stocks. The fund has consistently maintained a mix of stocks across varying market capitalisation, with a higher tilt to mid caps compared to small caps. Howev...

SBI Small Cap Fund

SBI Small Cap Fund scheme seeks to provide investors with opportunities for long-term growth in capital along with the liquidity of an open-ended scheme by investing predominantly in a well diversified basket of equity stocks of small cap companies. SBI Small Cap Fund has widened its margin of outperformance relative to its category and benchmark in the last one year, earning itself a five-star rating. The fund shows a hefty 18 percentage-point outperformance relative to its peers in the last one year, 5 percentage points over three years and 4 percentage points over five years. Needless to say, it has also outpaced its benchmark to deliver convincing five-year annualised returns of 37 per cent. A believer in the credo that a small market cap does not reflect business quality, the fund looks for five attributes in the stocks it buys: competitive advantage, return on capital, growth, management and valuation. SBI Small Cap Fund is among the few in this space to remain at quite a man...
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