nse share split process and impact on investors

A share split is a corporate action where a company divides its existing shares into a larger number of shares with a lower par value, as explained in the article section "Why do companies split their shares?".

This means that each shareholder will receive more shares, but the total value of their investment remains the same. For instance, if a company splits its shares 2:1, you'll receive one new share for every two shares you already own.

The National Stock Exchange (NSE) has rules and regulations for share splits, which are outlined in the article section "NSE Share Split Process". The process typically involves a notification to the exchange, a change in the company's capital structure, and an update to the share listing.

As a result of a share split, the market capitalization of the company remains the same, but the share price may decrease, making the stock more affordable for investors.

A stock split is a process where a company divides its existing shares into a larger number of shares, typically to make the stock more affordable for new investors. This can be done in various ratios, such as 1:5, where one old share becomes five new shares.

If a company undergoes a stock split, existing shareholders may notice an increase in the number of shares they own, but the total value of their investment remains the same. For example, if IRCTC's share price was at ₹ 4500, a 1:5 stock split would make the share price ₹900.

A stock split can also make it easier for existing shareholders to manage their portfolios, as they now have more shares to work with. This increased liquidity can be beneficial for long-term investors.

If you're not a shareholder of the company that went for a stock split, you may have an opportunity to buy the shares now at a lower price than before. This can make the stock more attractive to new investors.

Companies engage in stock splits to make their shares more accessible to a larger number of investors. This can be seen in Apple Inc.'s seven-for-one stock split in June 2014, which made its shares more affordable for small investors.

A high share price can deter potential investors due to the substantial investment required for acquiring a single share. This was the case with Apple's share price of $649.88, which was beyond the share prices of similar companies in the same sector.

Companies often undertake stock splits to enhance their stock's liquidity and accessibility. Amazon Inc.'s 20:1 stock split in June 2022 is an example of this, where the share price decreased from Rs. 2,447 to Rs. 122.35, making it more affordable for new investors.

A stock split can also create a perception of affordability and growth potential, attracting new investors. This can be seen in the case of IRCTC, where its share price decreased from ₹ 4500 to ₹ 900 after a stock split in the ratio of 1:5 in October 2022.

A stock split does not change the fundamental value of the business. The total market value, earnings, and financial health of the company remain the same before and after the split.

Companies may also split stocks to make them look more enticing to investors. Amazon Inc.'s 20:1 stock split in June 2022 is an example of this, where the company's share price was relatively high before the split.

Existing shareholders benefit from stock splits as they receive additional shares, making it easier to manage their portfolios. For example, an investor who owned 1,000 shares of AAPL before Apple's stock split in 2014 received 6,000 additional shares, bringing their total to 7,000 shares.

A stock split can also increase the stock's liquidity, making it easier for investors to buy and sell shares. This was seen in the case of Apple's stock split in 2014, where the price per share increased from $649.88 to $95.05 the day after the split.

A stock split can boost liquidity by increasing the total number of shares available in the market, leading to higher trading volumes.

This makes it easier for investors to buy and sell the company's shares, which can be a big plus for both existing and new investors.

A stock split can also make shares more affordable, as seen with IRCTC's share price dropping from ₹ 4500 to ₹ 900 after a 1:5 split in October 2022.

This can attract more investors, especially small ones, who may have been priced out before.

The perception of affordability can drive up demand and prices, as seen with Apple's stock price increasing from $649.88 to $95.05 after a 7-for-1 split in June 2014.

Existing shareholders can also benefit from stock splits, as they get to hold more shares of a company without the value changing.

This can be a good thing for investors, as the strength of a company's stock comes from its earnings, not the price of its stock.

In fact, a stock split can be a sign that a company is growing and open to future growth prospects, making it a good thing for investors.

A stock split might seem like a good thing, but there are some potential downsides to consider.

A stock split doesn't change the underlying value of a company. Its market capitalization, earnings, and fundamentals remain the same before and after the split.

Increased volatility is another possible issue. A stock split can make the stock price more unpredictable, leading to wider bid-ask spreads and more dramatic short-term price changes.

A company splitting its stock can sometimes be perceived as a sign of financial difficulty or a lack of confidence in its future performance. This perception can negatively affect the stock price and investor sentiment.

Here are some key downsides of a stock split to keep in mind:

A stock split is a way for companies to make their shares more accessible to investors by lowering the trading price. This is done by increasing the number of shares outstanding while keeping the total investment value the same.

For example, if you hold 100 shares in a company at a share price of Rs. 10, your total investment value is Rs. 1,000. If the company opts for a reverse stock split in a 1:2 ratio, you'll now hold 50 shares, but your total investment value remains Rs. 1,000.

A stock split can occur at any time, but it's often done when a company's share price has risen significantly. This makes it easier for new investors to buy shares at a lower price.

Companies can choose any split ratio, such as 2:1, 3:1, 5:1, 10:1, or 100:1. For instance, a 3-for-1 split means that for every share you hold, you'll now have three shares.

Existing shareholders receive additional shares when a company issues them, increasing their total shares by the specified split ratio. This can provide more liquidity and ease portfolio management.

The total investment value remains unchanged in a stock split, so you don't need to worry about your investment losing value. In fact, a stock split can make it easier for you to buy and sell shares.

A stock split can have a significant impact on investors, both existing and new. The number of shares held by an investor changes, but the total value of their investment remains the same.

For existing shareholders, a stock split can ease portfolio management and provide more liquidity with an increase in the number of shares. This makes it easier to buy and sell shares, as there are more shares available in the market.

However, the value of an investment remains the same, assuming there are no other changes in the stock price. This means that the investor's ownership percentage in the company remains the same, but the number of shares they hold and the price per share change.

New investors may find a stock split attractive, as the reduced price makes the stock more affordable. For example, if a company's share price was previously too high, a stock split can make it more appealing to new investors.

Here's an example of how a stock split can affect the number of shares and price per share:

As you can see, the total value of the investment remains the same, but the number of shares and price per share change. This can make the stock more attractive to new investors, while existing shareholders can still maintain their ownership percentage in the company.

In some cases, a stock split can have a negative impact on investors, especially if the stock is already trading at a low price. However, recent studies suggest that exactly half of the stock splits resulted in positive returns during the one-year period following the event.

If a company decides to do a stock split, like TATA Steel did in July 2022 with a 10:1 ratio, it affects the way we calculate futures and options contracts.

The adjustment factor is simply the stock split ratio. For a 10:1 ratio, the adjustment factor is 10.

To find the revised futures or strike price, you divide the old price by the adjustment factor. So, if the old strike price was 100, it would become 10 after the split.

The same calculation applies to the market lot. You multiply the old market lot by the adjustment factor to get the new one.

Here's a quick rundown of the steps to calculate the revised futures or strike price and market lot:

In India, stock splits have been a notable phenomenon, with companies like Hindustan Aeronautics Ltd (HAL) and BCL Industries undergoing significant splits.

A notable example is HAL's 1:2 stock split, which resulted in each existing equity share being divided into two shares, halving the face value of each share.

The split was approved by HAL's board to make the shares more accessible to a wider range of investors.

Before the split, HAL's shares were performing robustly in the market, but following the announcement and completion of the split, the shares opened higher and experienced significant growth over the year.

Specifically, the stock saw a 107% rise in one year, a 258% increase over two years, and more than a 400% increase over three years.

Similarly, BCL Industries underwent a 1:10 stock split, where one share with a face value of ₹10 was split into 10 shares with a face value of ₹1 each.

This move made the stock more affordable and increased liquidity in the market, resulting in a significant rise in the share price from around ₹324 to ₹480 per share levels, registering a rise of nearly 50% in the year-to-date period up to the split.

Here are some key takeaways from these examples:

In another example, XYZ Limited underwent a 1:10 stock split, where each existing share with a face value of Rs. 10 was subdivided into ten shares with a face value of Rs. 1. This move made the stock more affordable and increased liquidity in the market.

Before the split, XYZ Limited's share price was approximately Rs. 25,000 per share, but after the split, the price per share adjusted to around Rs. 2,500.

Similarly, ABC Limited approved a 1:5 stock split, where each existing share with a face value of Rs. 10 was subdivided into five shares with a face value of Rs. 2 each.

This split resulted in the price per share being approximately one-fifth of the pre-split price, making it Rs. 100 per share.

Company X also underwent a 2:1 stock split, where the original share price was Rs. 1,400 and the share price was adjusted to Rs. 700 per share after the split.

Despite the split, the investor's total investment remained the same, at Rs. 14,000.

The key dates and timeline for an NSE share split are crucial to understanding the process. The record date is when a company reviews its records to identify shareholders eligible for a share split.

This is typically a specific date set by the company, and it's essential to note that existing shareholders will receive sub-divided shares credited with the new ISIN on the trading day following the record date.

The ex-split date is when the stock begins trading at the newly adjusted split price. This is a significant date for investors, as it marks the start of trading at the new split price.

Here are the key dates to keep in mind:

Stock splits are a common occurrence in the stock market, but what's the ultimate goal? A stock split is used primarily by companies that have seen their share prices increase substantially.

This means that companies with high stock prices are looking to make their shares more affordable to smaller investors. The number of outstanding shares increases, and the price per share decreases.

The market capitalization, or the value of the company, remains the same. This is a key point to remember, as it's often misunderstood.

By reducing the price per share, stock splits provide greater marketability and liquidity in the market. This can be a huge advantage for investors who want to buy or sell shares.