What is stock split?





A stock split or stock divide increases the number of shares in a public company

Stock split refers to split the face value of the shares of companies. Accordingly, in 1:10 split, shares of Rs. 10 face value may be reduced to face value of Re. 1. In such case, you will have 10 times the initial number of share held. However, the price of shares would also fall proportionately split but the total value of your holding remains the same. This mean more number of shares are available for investors. This is illustrated in table
below.

 

Face value of share (Rs.)

No. of shares initially held

No. of shares after the split

Share price* (Rs.)

Total value of shares held (Rs.)

10

1

0

100

100

5

0

2

50

100

2

0

5

20

100

1

0

10

10

100

* Share price may differ based on the demand and supply factors in the market.

 

Change in face value of shares only changes its denomination, without any change in its total value. Illustratively, the value of your money held remains the same whether you hold Rs. 1,000 or two notes of Rs. 500 or 10 notes of Rs. 100 or 20 notes of Rs. 50. Accordingly, the capital of the company also remains unchanged after the stock split as illustrated in table below:

 

ABC company

Before stock split

After 1:10 stock split

Number of shares issued

100

1,000

Face value of shares issued

Rs. 10

Re. 1

Equity capital

Rs. 1,000 (100 shares X Rs. 10)

Rs. 1,000 (1,000 shares X Re. 1)

Reserves (accumulated profits)

Rs. 12,000

Rs. 12,000

Net worth (Equity + Reserves)

Rs. 13,000

Rs. 13,000

 

As a shareholder you are entitled to receive additional shares on account of the split, as and when it is proposed by the board of directors and approved by shareholders in general meeting of the company. These are credited to your demat account.

 

In case of physical certificates, depending on the board resolution, you may have to surrender your existing certificates and the new certificates with the changed face value will be issued to you.

 

Points to remember:

  • Equity shares, like any other asset, derive their value from the price at which others are willing to buy or sell it. In the absence of willing buyers / sellers, shares of a company can become illiquid. The risk of illiquidity is inherent in investing in shares over which SEBI does not have any control.

  • You will earn return on your investment in shares only if the company performs well. Unlike bank deposits, there are no guaranteed returns in investing in shares.

  • In some instances, the promoter of the company or an acquirer or the company himself may want to buy the shares of the company to increase their shareholding or buy back shares to enable delisting the company from the stock exchange.

  • In such cases, they are required to make an open offer to buy shares from all the shareholders. You have the option to tender your shares in response to such offers. You will receive money from the acquirer, if your shares are accepted.

Source: Securities and Exchange Board of India

 

Read more:

 

What is a fractional share?



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