Stock Split

Recently Airtel share price have slashed down to half. In a confusion I started searching the newspaper to know the reason behind this, that too this happened when it is financially strong and leaders in the telecom industry. From Economic Times I came to know Airtel have undergone stock split after all of its share holders interest. What is stock split? Why the company go for stock split? Is that advantage or disadvantage for an investor? These are the questions for which I was searching answers.

Stock split is basically an action taken by a corporate to increase the number of shares thereby decreasing the share price with out affecting the companies capital. In this (Airtel) case, Airtel had conducted a postal ballot across all the share holders regarding 'vote against the stock split' or 'vote for the stock split'. Majority voted 'FOR' the stock split and the company implemented the same.

Basically the companies go for stock split when the price of the stock gets higher and higher and because of this some small investors keep away from buying this stock. So splitting the stocks brings the prices down and make it attractive. Also it gives a feel to the existing share holder that their shares are suddenly doubled and ofcourse price cut down.

Lets take an example. Say a compnay have 1,000 share at price Rs.100. Now the capital of that company comes to (1,000 x 100 = Rs.1,00,000). Now after stock split in the ration 2:1(two share for every single share) the number of shares doubles to 2000 (1000 x 2) and the share price drive down to Rs. 50 (100/(2/1) = 50). If we calculate the comapany's capital after the split (2,000 x 50) it comes to Rs.1,00,000, which is same before the split. So the capital of the company is not at all changed.

Sometime companies go for reverse stock split. ie 1:2(one share for every 2 share). They basically go for reverse stock split to increase the value of their share to gain respect in the market. Say a company have 1,000 share at price Rs.50. Now the capital of that company comes to (1,000 x 50 = Rs.50,000). Now after reverse stock split in the ration 1:2 the number of shares is halfed to 500 and the share price drive up to Rs.100 (50/(1/2) = 100), So 500 x 100 = 50,000 is the companies capital after reverse stock split.

8 comments:

Aski said...

Very Useful...

(¯`·._.·NIVAS·._.·´¯) said...

@Aski: Thanks da machi

Mathi Rajan said...

Good - Keep posting!

(¯`·._.·NIVAS·._.·´¯) said...

@Mathi: Thank you mathi.

Praveen.V.Nair said...

Thats really a good post man. I learned a new thing today...

ArunKumar.Dharuman said...

Thanks Nivas. Its indeed a good post. Is there any reasons for going stock split other than making the stocks attractive for investors? What it makes for the existing share holders?

(¯`·._.·NIVAS·._.·´¯) said...

@Arun: For existing investor the quantity increases asper split ratio. Ofcourse the face value of the stock decreases so the dividend income of the company may also decreases

(¯`·._.·NIVAS·._.·´¯) said...

@Nair: Its my pleasure.