Share splits, or stock splits, are common in finance and investing. If you are an investor or plan to invest in stocks, it is crucial to understand the complexity of stock splitting. In this article, we will explore what dividend splits are, what they mean, emerging dividend splits, and recent examples. Additionally, we will examine seven critical factors that investors should know before starting a stock/share split.
Let us understand Stock Splits better.
What is a Share Split?
A share split, or a stock split, is a corporate action in which a company divides its existing shares into multiple shares. This means that for each share held by an investor before the split, they will receive a specified number of new shares. The most common types of share splits are 2-for-1 or 3-for-1, which means that for every old share an investor owns, they will receive two or three new shares respectively.
Share splits are typically undertaken by companies to adjust their stock price. When a company’s stock price becomes too high, it may deter potential investors or make it challenging for small investors to buy shares. By splitting the shares, the stock price decreases, making it more accessible to a broader range of investors. This can increase liquidity and marketability for the company’s stock.
Here are some terms and definitions to know about share splits :
|Share Split||A corporate action in which a company divides its existing shares into multiple shares, usually to reduce the face value per share.|
|Face Value||There is no change in the total market capitalization of the company, but the number of outstanding shares increases.|
|Objective||To make shares more affordable for retail investors and increase liquidity in the stock market.|
|Example||If a company with 100 shares of face value ₹10 each undergoes a 1:2 split, it will have 200 shares with a face value of ₹5 each after the split.|
|Impact||The date shareholders must hold the stock to be eligible for the split.|
|Stock Price||The stock’s market price adjusts inversely to the split ratio. In the example above, the stock price would halve post-split.|
|Record Date||The date on which shareholders must hold the stock to be eligible for the split.|
|Ex-Split Date||The date on which the stock starts trading at the adjusted post-split price, excluding the rights to the split.|
|Benefits||Attracting more retail investors, enhancing liquidity, and potentially making the stock more affordable.|
|Risks||Market perception, loss of some institutional investors, and psychological impact on shareholders.|
7 Important Things to Know Before a Share Split
Before participating in a share split, investors should be aware of certain key aspects to make informed decisions. Let’s explore these seven crucial factors:
1. Understand the Ratio
When a company announces a split, you first must know how it will be done. As mentioned, segmentation is usually done in ratios such as 2-to-1 or 3-to-1, but other ratios can also be used. Knowing the ratio is important because it determines how many new parts you get for each old part you own.
2. Check the Record Date
The record date is when the company records are examined to determine which shareholders are entitled to additional shares due to the split. The shares must be received by the record date to benefit from any dividend. Missing this date could mean missing out on receiving the dividend announced.
3. Analyze the Ex-Dividend Date
The previous dividend date is equally essential in determining who can receive shares. New investors who purchase shares after the prior distribution date will not receive the shares associated with the previous distribution period. Know this date to ensure you don’t miss your potential dividend income.
4. Research the Company’s Motive
It is essential to understand why a company uses share splits. Usually, this reduces the stock price, but there may be other reasons, such as improving market liquidity or attracting more investors. Research the firm’s official report or consult with financial experts, and you have gained insight into their motivations.
5. Assess the Market Reaction
Stock splits generally cause changes in a company’s share price and trading volume. Investors should examine the market reaction to the separation announcement. Stock splits have historically been associated with good market practices, but it is vital to consider the overall market conditions and company-specific conditions.
6. Review Your Portfolio
Check your investments carefully before allocating shares. Determine the impact of the split on your total net worth. If you have many shares in the distributing company, the increase in the number of shares may change according to your portfolio.
7. Seek Professional Advice
Investing in the stock market can be complex, and share splits are no exception. If you’re unsure how a share split may affect your investments or what actions to take, consider seeking advice from financial advisors or experts in the stock market.
Example of Share Split:
One notable example is Apple Inc.’s 2020 share split, where the company executed a 4-for-1 split. This means that for every share an investor held before the split, they received four new shares. The split aimed to make Apple’s stock more affordable and attract a broader range of investors. As a result, the company’s stock price adjusted and became more accessible to individual investors.
Recent Split Shares
It’s also beneficial to explore recent examples of share splits to gain insights into how they can impact a company’s stock and investor sentiment. Here are a few recent cases:
Share Splits In India
|Year||Company||Share Split Type||Description|
|2020||Reliance Industries||Stock Split||Reliance split its shares in a 1:4 ratio to make them more affordable for investors.|
|2018||TCS||Bonus Issue||TCS issued bonus shares in a 1:1 ratio to reward shareholders without altering share price.|
|2016||Infosys||Stock Split||Infosys underwent a 1:2 stock split, doubling the number of shares while halving their price.|
|2014||ITC||Stock Split||ITC executed a 1:1 stock split to enhance liquidity and accessibility for retail investors.|
|2012||HDFC Bank||Stock Split||HDFC Bank performed a 1:5 stock split, reducing share price and making shares more affordable.|
- Amazon.com, Inc. (May 2021): Amazon announced a 20-for-1 share split, significantly reducing the stock price and making it more attractive to more investors. The market reacted positively to this news, increasing the stock’s value.
- Tesla, Inc. (August 2020): Tesla executed a 5-for-1 share split, making its stock more affordable for retail investors. The split led to a surge in Tesla’s stock price and increased trading volumes.
- Alphabet Inc. (July 2014): Google’s parent company, Alphabet, executed a 2-for-1 share split. The split aimed to improve market liquidity and enhance the stock’s appeal to retail investors.
These examples show share splits’ varying motivations and outcomes, emphasizing the importance of staying informed and conducting thorough research.
Share splits are an everyday board activity in banks aimed at adjusting a company’s share price and making it available to several investors. Investors must understand the basics of share splits, such as ratios, listing dates, and market action, to gain insights into the potential impact of the split.
Investing is a complex undertaking, and portfolio splits are just one of many factors to consider. However, with the proper knowledge and preparation, investors can navigate the dividend cycle successfully and take advantage of the opportunities.
What is the purpose of a share split?
Shares are usually split by companies to reduce the value of their stock, making it less expensive and more accessible to investors. This can increase market liquidity and improve the sale of stocks.
How can I stay updated on upcoming share splits?
Monitor financial reports, company announcements, and stock market websites regularly for information on upcoming stock splits. Companies usually announce dividends long in advance.
What should I do if I own shares in a company that is issuing a share dividend?
If you own shares in a company that is making a dividend, in addition to understanding the details of the split, including the ratio, the record date, and the date of the previous dividend, consider that you will seek professional advice to assess the impact on your investment and make informed decisions.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.