Stock Split – is it good for you?

What is a stock split?
A stock split happens when a corporation decides to increase its number of outstanding shares. The price per share will be adjusted such that the market capitalization of the corporation stays the same. In effect, a stock split does not alter the financial position of either the corporation or the shareholder.

Example.
If an investor owns 100 shares of company ABC at a current market price of Rs.350, a 2 for 1 stock split will leave the investor with 200 shares. The new price per share after the split will be Rs. 175. Hence the total investment value will remain the same at Rs.35,000.

Why do stocks split?
Corporations announce stock splits to decrease share prices either to attract smaller investors or to keep their share prices at levels comparable to competition.

Is it good for you?
A stock split results in a lower share price and may attract more investors. This in turn creates a positive market sentiment that may drive the share price upwards. This is the rationale behind the strategy of investing in a share around the time of a split. Although there is data to support the theory that the stock price surges after a split, there is no actual change to the fundamental value of the company and so any investment made should be speculative rather than value based.