Why companies split their stocks

On this Thursday, 20^th November 2014 my colleague told me that he was shocked to see the share price of State Bank of India (SBI) quoting at Rs.290 per share. His demat account was showing a loss of Rs.6000”. For a minute, he couldn’t believe that SBI share which was quoting at around Rs.2900 had dropped to a mere Rs.290 per share.

This is due to stock split done in the ratio of 1:10 by SBI.

What stock split means?

The face value of the share is reduced from higher denomination to lower denomination. Thereby, the number of shares will increase. For example, the face value of one SBI share was Rs.10 and it is split into 10 shares of Rs.1 face value. So, someone who has 10 shares of Rs.10 each (worth Rs.100), after the split get 100 shares of Rs.1 each (worth Rs.100), whereby the value of the shares won’t come down but the number of shares will increase.

Why company resorts to stock split, if there is no change in the worth of shares?

• To make the stock (shares) affordable. For example, SBI share at Rs.2900 per share looks unaffordable when you compare it with Rs.290 per share. Now with the reduced value, say at Rs.290, the investors may buy 5 shares or 10 shares, instead of buying 1 share.

• By splitting the share, the number of shares available in the market for trading will increase. This will enhance the volume of trading in the stock exchange.

Any benefit to investors?

Technically, there is no benefit. But because of the split, the number of shares traded in the market will substantially goes up. The larger the volume of trading, the chances of increase of the prices are higher. Generally, post-split the stocks have done well in the market.

Any tax implications due to stock split?

No. The date of purchase of stock remains the original date of acquisition for calculating capital gain tax. So, one need not worry about additional tax due to stock split.

How will investor get additional shares due to stock split?

The company announces the date of stock split (such date is called as ‘record date’) and from that day onwards, the stock will trade at stock split ratio. For example, in case of SBI, from 21^st Nov, 2014, the stock is trading at Rs.1 face value. However, to reflect the increased shares in the investors account, it will take couple of days.  The investor can watch his account, after a week and see whether the additional shares are credited to his demat account. If not credited, he can check the status with his service provider.

Thought for the day

Small opportunities are often the beginning of great achievements.

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