UNDERSTANDING A STOCK SPLIT

A Stock Split is a corporate action where the face value of the existing shares is reduced in a defined ratio. A stock split of 1:5 means split of an existing share into 5 shares. Accordingly, face value of shares will go down to 1/5th of the original face value. For example, if an investor holds 100 shares of a company with a face value of Rs.10 each, a stock split in the ratio of 1:5 will increase the number of shares held by him to 500 but the face value of each share will go down to Rs. 2. From the company’s perspective, there is no change in its share capital since an increase in the number of shares is offset by a fall in the face value and resultant multiplier of face value and outstanding no. Of shares remains the same.

Companies consider splitting their shares if prices of their shares in the secondary market are seen to be very high restricting the participation by investors. As price per share comes down post-split, share split leads to greater liquidity in the market.

Similar to bonus, split is also a book entry resulting in increased number of outstanding shares in the books of company with reduced face value without any economic benefit whatsoever to the shareholders. We may say that share split is also to influence the psychology of investors (of reduced market price per share) and to impact liquidity in the market place without any economic benefit to the shareholders. As the total number of shares go up without any economic change in the Profit and Loss statement or Balance Sheet, per share data (earning per share, book value per share, market price per share etc.) witnesses immediate deterioration. However, as shareholders’ proportionate ownership remains unchanged and number of shares held by them go up, at overall ownership level, there is no negative impact to the shareholders.

For example, SBI initiated a stock split of its equity shares from a face value of Rs.10 to Re.1. A shareholder holding 1 share of a face value of Rs.10 will now hold 10 shares each with a face value of Re.1. The stock that was trading in the markets at over Rs.2700 at the time of the announcement traded post-split at around Rs.295. The value of the shareholder’s holding was around Rs.2700 (1 share x Rs.2700) prior to the stock split. Post the split, the value of the holding is Rs. 2950 (10 shares x Rs.295). The market price after the split will depend upon the market forces of demand and supply.

Comments

THESIS ON CENTRAL DEPOSITORY SERVICES (INDIA) LIMITED (CDSL)

Central Depository Services (India) Limited (CDSL) is very good stock to hold for long-term investors and I am presenting a thesis on it which is as follows: · Its fundamentals are very strong and impressive which can be understood from the following points: Ø It is a debt free company. Ø It has delivered a good profit growth of 24.10% CAGR over last 5 years. Ø It has been maintaining a healthy dividend payout ratio of 42.69%. Ø It has a healthy Cash from Operations. Ø It has a healthy ROE and ROCE of more than 20%. Ø It has a very healthy Operating and PAT Margins of 75.51% and 58.55% respectively as per the financials of F.Y. 2020-21. · The penetration to equity markets in India is still very low as roughly about 3% of India’s population invests in equity markets as compared to 55% in US, which suggests that there’s lots of headroom for India’s stock marketplace penetration to grow. This gives CDSL a great opportunity to grow and benefit fro

UNDERSTANDING ESG FRAMEWORK

Most investors focus on the profit generating ability of a business to make investment decision. However, over the last few years, the societal discussions about companies and businesses have also started focusing on sustainable development, and corporate social responsibility. This has given traction to investment theme that is focused on Environment, Social and Corporate governance (ESG). Initially this framework was used by handful of “Impact” investors. But this framework has gradually gained traction as these frameworks also provide commercial value. Under this framework investors evaluate companies based on these criteria: (i) How does the company’s activities affect the environment? Companies with low carbon emission and low contributors to pollution rank better than others. (ii) What are the activities that the company perform in terms of social development? This includes focus on human rights, gender equality and many such social factors. Companies that contribute more

WHAT ARE DEFENSIVE INDUSTRIES?

These are industries that create products and services that have low income elasticity i.e., a fall or rise in income does not affect the demand significantly. Therefore, these industries experience minimal impact on account of economic cycles. Rather, their business prospects are affected only by secular trends. Food, agricultural inputs, healthcare and pharmaceutical are some of the industries that come under this category. The defensiveness of this industry is the reason why analysts generally suggest to shift to the defensives during a equity market correction.

FINANCE TALKS

Search This Blog