- By Anshul Pradhan
What is Stock Split:
A company performs a stock split to increase the amount of shares they have available. This is done to boost its stock liquidity. Although the number of shares increases, it doesn’t change the value of the company.
If you hear anyone talking about a stock split, they’re most likely saying 2-for-1 or 3for-1. This just means that for every share someone has before a split, they’ll gain two or three more afterwards. A stock split is a corporate action in which a company issues additional shares to shareholders, increasing the total number of shares by a specified ratio based on their previous holdings.
Companies often choose to split their shares to reduce the trading price to a more comfortable range for most investors and to increase liquidity when trading their shares. So, when stock prices increase significantly, many public companies end up declaring stock splits to reduce their shares. A company`s board of directors can choose to divide shares in any ratio. On the other hand, the stock price after a 3-for-1 stock split will decrease by dividing the old stock price by 3. This is because a stock split does not change the value of the company as measured by market capitalization.
Advantages: First, a company often decides on a split when the stock price is quite high, making it expensive for investors to acquire a standard board lot of 100 shares. Second, the higher number of shares outstanding can result in greater liquidity for the stock, which facilitates trading and may narrow the bid-ask spread. Increasing the liquidity of a stock makes trading in the stock easier for buyers and sellers. This can help companies repurchase their shares at a lower cost since their orders will have less of an impact on a more liquid security. Although, in theory, a split should not affect the stock price, it often increases investor interest, which can have a positive impact on the stock price. Although this effect may fade over time, stock splits of blue-chip companies bring optimism to investors.
Disadvantages: Not every aspect of a stock split benefits the company. The stock split process is expensive, requires legal oversight, and must be carried out in accordance with the law. The company that wants to split its shares must pay a very high price so that the overvaluation in the stock market does not change.
A stock split is not worthless, but it does not affect the company`s fundamental position and therefore does not create additional value. Some people compare a stock split to cutting a piece of cake. Some opponents of stock splits say they risk attracting the wrong group of investors. Instead, to maintain sole ownership of shares, a company may intentionally not want to split its shares. Finally, intentionally lowering a company's stock price has consequences. Public exchanges like NASDAQ require stocks to trade at $1 or more.
How Political and social markets influence companies for stock split:
However, political and social markets can play a role in shaping perceptions and emotions toward a company, which can indirectly influence that company`s decision to split its shares. If a company is seen as excluding certain segments of the population due to its high share price, this may lead to calls for a stock split to make the shares more accessible to more investors. Companies often split their shares when the share price becomes very high, which makes it less accessible to retail investors and can affect liquidity. Ultimately, the decision to split shares is made to manage factors such as share price, liquidity and market access.
Nestle Stock Split:
If you're an investor in Nestle India stock, here are all the details you need to know about the stock split announced by the company on Thursday.
The board of directors of Nestle India, in its meeting on October 19, approved a stock split in the ratio of 1:10. This means that each share held by an investor has the face value of ₹10 per share will now be subdivided into 10 equity shares having a nominal value of Re 1 each.
The stock split will reduce Nestlé India's share price to one-tenth of its current price. This will make the stock more affordable for retail investors and, therefore, improve the liquidity of the counter. The record date for dividing existing shares has not yet been announced. The company said shareholders will be informed about the same later. The stock split record date is the date on which the company examines its records to determine which shareholders are eligible to split their existing shares.
This is the first share split of Indian FMCG giant Nestle.
On Friday, following the stock split announcement, Nestle India shares rose 2. 5 per cent to a record high of ₹24,735.
50 on the BSE.
Heavy trading volumes were seen in the stock with the number of shares changing hands by BSE rising five times the daily average in early noon trade on Friday. Small retail investors can now add a big company like Nestle to their portfolio as it was not possible earlier. Nestle includes many known products like Maggi, KitKat, Milky-bar and other FMCG products.
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