What Are Stock Splits?
A stock split is when a company increases the number of outstanding shares to increase the liquidity of the stock. Though the number of shares of the company increases, the market cap stays the same. Existing stocks split, the number of shares increases and the price per share decreases.
For instance, a company announced a stock split of a ratio of 1:2 for a share with a face value of ₹10. This means for every share held, the shareholder gets two shares. Each with a face value of ₹5.
Factors To Consider While Analysing Stock Splits
- Understand the ratio: When a company announces a stock split, understand the ratio as it decides how many new shares you get for each share you already own.
- Check the record date:The record date is the date the company records are analysed to check which shareholders are entitled to extra shares from the split.
- Check the ex-dividend date:The ex-dividend date is nothing but the previous dividend date. It also determines who can receive shares. If you buy shares after this date, you won't get the dividend from the earlier period. Be aware to not miss out on potential dividend income.
- Understand the company’s objective:It is important to know the motive behind the stock splits. Usually, it reduces the stock price, improves market liquidity or attracts new investors.
- Analyse the market reaction: Generally, stock splits cause changes in the stock price and trading volume. You should note the market reaction to it.
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