Some stocks are which are fundamentally strong and have historical consistent long performance
hardly need to split their stock. A share split is more psychological than an actual reflection of the value of the company.Let’s look at the other companies which have similar prices.
The above are the 13 stocks that are above the price of Rs. 10,000 it wouldn’t have made any difference to the value of the stock if they were priced below Rs. 100 or Rs. 1000.
There are two types of Split but most people know only one of them.
2:1 & 1:2
In other words, it is a forward split and a reverse split. And once you understand this it will make all the difference.
Now just think as a piece of cake. You have just got 1 Kg cake either you cut it into 10 pieces of 100 Grams each or 20 pieces of 50 grams each the weight of the cake would remain the same.
Likewise, the split doesn’t contribute anything to the company fundamentally.
Let’s discuss the advantage of Split
- When the price of the share goes down with a higher dividend then dividend yield looks attractive.
- Increases the liquidity since the number of shares that are available for trade increases there is higher liquidity.
- It makes the new investor feel price affordable.
- More Number of shares to current shareholders.
- Investors may get a bonus.
- Indicates company growth becuase a company with falling share prices will rarely give a split.
Disadvantages of Stock Split
- Increased Liquidity might lead to increased volatility .
- Involves cost
- Book Keeping becomes a little complicated.
- Risk of Price Fall
- Adds no value to the company .
You would be also surprised to know there are many other companies that haven’t done share split. Like Berkshire Hathaway Inc.
My view Chintan Chheda's answer to Should I buy MRF shares?
If you enjoyed this post, I’d be very grateful if you’d help it spread by emailing it to a friend or sharing it on Twitter or Facebook. Upvote & Share on Quora. Thank you!
Footnotes