Meaning Of Share Price Split:
Share price split means dividing the share price in decided proportion and increasing the share quantity in the market. Let’s discuss with example of HAL company for better understanding.
Recently HAL company has split their shares by 1/2 which means they have divided share price by 2 and share quantity multipled by 2.
Suppose I have 10 shares of HAL in my demat account and the share price is around 4000 per share. So the current valuation is 4000 x 10 = Rs. 40000.
What will change in my holding after a split?
Share price = 4000 / 2 = 2000 per share
Share quantity = 10 x 2 = 20
Holding Value = 2000 x 20 = 40000
The share price will decrease by 50% and the quantity will double. Also, the holding valuation will be the same as the existing investor.
Why the company split their share:
When we enter the stock market as retail investors or traders that time our mindset is we have to focus on reasonable stocks i.e. in the range of Rs. 0 to 200. When HAL split its shares the price was around 4000 and if I suggest you buy this stock for the long term then the first thought that comes to your mind is it’s costly. However, if I suggest you invest in Bank Of Maharashtra i.e. Rs. 50 per share then you will buy immediately because it is of Rs. 50 only.
Most retail investors never compare company fundamentals and share price charts to identify reasonable or costly stocks. The company splits its shares to attract retail investors.
Let’s take one more example, everyone knows MRF (NS:) company and I hope everyone wants to buy a share of MRF. But when we look at the share price we lose our confidence because the share price is more than 1 lac per share. However, If the company splits the shares by 1/10 then the share price will be around 10,000 then some people would prefer to buy it. That is the psychology behind the share price split.
Benefits Of Stock Split:
The share quantities increase in the split proportion.
The share price decreases in the same proportion.
Fresh investors start to invest as share gets reasonable rate.
Fundamentally strong company’s share price increases after the split and it helps to increase the market capitalization of the company.
Should We Invest In Split Stock?
Yes, we can invest if the company has strong fundamentals and the technical chart structure is good. I bought Eicher Motors (NS:) Ltd at 2300 in 2020 after the price split into 1/10 and sold it at 2700 in a few months.
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