Stock Market

34.

Are stock splits good for investors?

First let us understand what is stock split. A stock split is fundamentally when a firm increases the number of shares. For example if a trader owns 50 shares of a particular company costing Rs.10 Per share and there was a 2-1 stock split, then the owner will own 100 shares worth Rs.5 each. Now everyone will have the doubt in mind that why do these companies issue splits if one still have the same amount of money. 

The answer to this demand is simple. Some firms believe that their stock ought to be inexpensive so more people can buy it. This creates a circumstance where more of the firm’s stock is bought and sold. This is technically called as “increased liquidity”. The difficulty in theory is that the enlarged movement will also leads to bigger gains and falls in the stock, making it more volatile. 

Caution

One should watch out for one type of split as a possible danger. As there is a facility of Stock Split, there is also the reverse solution available called as Reverse Stock Split. The reverse split is carried when the cost of each share is less than the minimum value listed by a stock exchange. In a reverse split, the firm reduces the amount of exceptional shares and per share price rises consequently. 

Consider an example if a corporation influence to perform a 1 for 2 reverse stock split, so it means for every two shares owned, the person would now own only one share and the per share value doubles. 

A reverse stock split is frequently used to increase up a stock’s price since the price upsurges on the split. Often a firm will do a reverse split to keep the stock rate from falling below the minimum required by the stock exchange where it is listed. 

Clearly, this is a sign that roughly something is wrong if a firm can’t keep its stock rate above the exchange’s least listing price and attention is advised. 

Conclusion

When the paid stockbrokers grounded on the number of shares bought, it made sense to buy a stock before it fragmented. However most negotiators now charge a flat fee so at buying before or after a split doesn’t make much intelligence from that perspective. Stock splits may seem like a gift to some investors, but there is little evidence that benefits in any meaningful way when a company splits its stock. 

Ultimately, one should buy a stock constructed on whether it meets the fundamental principles, as per the requirement and not on whether it will split or not.