We have many times seen and heard of stock split. What does this stock split, Why any company goes for stock split?
Stock Split is a corporate action, when company decides to divide its existing shares into multiple shares. This action increases the no. of shares reduces the price per share, however total market capitalization remain same. Stock split doesn’t add any real value to the shares.
Yes Bank on 21 September,2017 , had split in shares a 5 for1, thus the face value of the shares reduced to Rs 2 from Rs 10 per share. Thus no. of share floating in the market increased 5 times, but the market cap remains same, as the market prices of the share also reduced down proportionately.
But the question arises here is, why will any company would increase its shares in number. The first and foremost reason for splitting the shares is to make the shares affordable for the investor. Thus company whose shares prices are really high, which makes it difficult for an investor to buy a lot, thus Company intervene by splitting the shares and reducing the prices proportionately. Just like the example we took, of YES bank. Prices for YES bank share heightened to around 1716.90 approximately, post split, share prices reduced to 298.67, but immediately after market opened, stocks went up by 28% to 383.25. Thus stock split was done keeping in view to increase investor base by making the share affordable.
Second reason being increasing the liquidity in the stock, which helps in narrowing the bid ask spread , thus making investor to trade their share on exchange. Liquidity increases high degree of flexibility , thus investor can buy and sell share without mush hassle.
As a result of stock split , investor find a new avenue to park their money which was out of their reach earlier. Thus renewed interest of investors have positive impact on the share prices. Just in case of yes YES Bank, we saw a surge of 28% within few hours post splitting of shares in a single day.
Thus stock split has no real value addition or wealth creation for shareholder, but it does help in increasing the price of the share post split as small investor find the stock affordable thus demand picks up which in return raises the share price.
Thus in conclusion Stock Split is the corporate strategy used by companies for the above given reason without hurting the share holder’s sentiment.