Stock split corporate action

In this corporate action the number of shares outstanding is increased by splitting the face value. For example, if a company has 100 crore (1 billion) outstanding shares of Rs10 and announced a face split from Rs 10 to Rs2 per share. One share of face value Rs10 will become 5 shares of Rs2 face value. A person holding 1000 shares of the company will have 5000 shares after the stock split. The price also comes down proportionately on Ex-date i.e. in the above example the price will be 1/5th of the price before the split. The reason is Earnings Per Share (EPS) comes down as the Total profit remains same but number of shares are increased.

Companies split the stock when the price is too high for small investors to buy the shares. As the price comes down proportionately the liquidity increases in the counter as the small investors will start trading at the affordable price. Because of this reason the share price will move up after the split (i.e. the price will be little more than 1/5th of the price before the split in the above example).
Stock split doesn’t change the market capitalization of a company much. It’s an indication that the company is performing well and the share price is going up.

In a reverse stock split the face value of a share is increased there by reducing the number of shares outstanding. The companies choose this action when the share price is too low. This would also reduce manipulations by operators. When the face value of Rs2 is made Rs10 the number of shares decreases 5 times and the price increases 5 folds.

Only number of stocks and face value needs to be adjusted in the liabilities section of the balance sheet.

October 18, 2008 | Filed Under Stocks