Share Splits.

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Presentation transcript:

Share Splits

SHARE SPLITS Share or stock split is the process of splitting shares with high face value into shares of a lower face value. It’s like getting a Rs.20 note changed for two Rs.10 notes. A corporation whose stock is performing well may choose to split its shares, distributing additional shares to the existing shareholders. This requires approval from the board of directors and shareholders.

SHARE SPLITS Eg. ABC Ltd has 10,000 shares of Rs.100 per common stock outstanding with a current market price of Rs.150 per share. The board of directors declares the following stock split: Each common shareholders will receive 5 shares held. This is called a 5-for-1 stock split. As a result 50,000shares (10,000 shares*5) will be outstanding. The par of each share of common stock will be reduced to Rs.20 (Rs.100/5)

SHARE SPLITS A stockholder who owned 4 shares of Rs.100 par stock before the split would own 20 shares of Rs.20 par stock after the split (total par of Rs.400). Only the no. shares and the par value per share have changed. Since there are more shares outstanding after the stock split, the market price of the stock should decrease. Thus, the market price of the stock would be expected to fall from Rs.150 to about Rs.30 (150/5).

Reasons for share splits Companies split their stocks to be more affordable and liquid from retail investor’s point of view. More buyers and sellers will trade the shares.

Significance of share splits It is improving market liquidity It is important to generate greater investor interest. Post split price is also an important consideration in the financial market place for investor attention with other high quality securities. Long term investor will get an opportunity

Difference between Bonus share and share splits Point of Difference Bonus share Share splits Meaning Bonus share mean additional free shares allotted to the existing shareholders. It is a process of dividing the face value of shares. Face Value In bonus issue, face value of the share is not changing. In stock split, face value is changing. Share capital In bonus issue, the share capital and number of shares are increased. The share capital is not changed, but the number of shares is changed. Dividend Company has to give more dividend after the bonus share. There is no need to for more dividend in future Reserves Only a certain amount of the reserves is used. The reserves are not capitalised.