Stock split is a form of corporate action where the company decides to dissect their existing shares into smaller value shares but larger in quantity shares. This is done in order to either boost liquidity or reduce the price per share, making it more attractive to investors.
A stock split is a corporate action where a company divides its existing shares into smaller-value shares in greater quantity. This is often done to boost liquidity or reduce the price per share, making it more attractive to investors.
Stock splits are issued in a ratio determined by the company. For instance, Dr. Reddy’s set the ratio at 1:5, meaning shareholders will receive five shares for every one fully paid-up share held previously.
Example: If Mr. Jini held 20 shares of Dr. Reddy’s at ₹6,500 per share on the record date, then post-split, he will hold 100 shares at ₹1,300 per share. Notice how the total invested value remains the same at ₹1,30,000.
Aspect | Regular Stock Split | Reverse Stock Split |
---|---|---|
Objective | Increases liquidity and affordability by lowering the share price. | Aims to boost share price by reducing the number of shares outstanding, often to meet minimum listing requirements. |
Effect on Number of Shares | Shareholders receive additional shares, increasing the total number they own without changing the overall investment value. | Shareholders hold fewer shares, but the value of their holdings remains the same as the share price increases. |
Market Perception | Seen as a positive signal of growth and confidence in the company’s future. | Often perceived negatively, possibly indicating financial struggles or the need to stabilize share price. |
In summary, stock splits are a significant corporate action with various effects on both the company and its investors. Understanding these effects is essential for investors, as they impact both shareholdings and market perception. We hope this article has provided clear and detailed insights into stock splits.
Also Read: Corporate Demergers: Understanding Their Impact on Investors