A stock split or stock divide increases the number of shares in a public company
Stock split
refers to split the face value of the shares of companies. Accordingly, in 1:10
split, shares of Rs. 10 face value may be reduced to face value of Re. 1. In
such case, you will have 10 times the initial number of share held. However,
the price of shares would also fall proportionately split but the total value
of your holding remains the same. This mean more number of shares are available
for investors. This is illustrated in table below.
Face value of share (Rs.) |
No. of shares initially held |
No. of shares after the split |
Share price* (Rs.) |
Total value of shares held (Rs.) |
10 |
1 |
0 |
100 |
100 |
5 |
0 |
2 |
50 |
100 |
2 |
0 |
5 |
20 |
100 |
1 |
0 |
10 |
10 |
100 |
* Share price may differ based on the demand and supply
factors in the market.
Change in face
value of shares only changes its denomination, without any change in its total
value. Illustratively, the value of your money held remains the same whether
you hold Rs. 1,000 or two notes of Rs. 500 or 10 notes of Rs. 100 or 20 notes
of Rs. 50. Accordingly, the capital of the company also remains unchanged after
the stock split as illustrated in table below:
ABC company |
Before stock split |
After 1:10 stock split |
Number of
shares issued |
100 |
1,000 |
Face value of
shares issued |
Rs. 10 |
Re. 1 |
Equity capital
|
Rs. 1,000 (100 shares X Rs. 10) |
Rs. 1,000 (1,000 shares X Re. 1) |
Reserves
(accumulated profits) |
Rs. 12,000 |
Rs. 12,000 |
Net worth
(Equity + Reserves) |
Rs. 13,000 |
Rs. 13,000 |
As a shareholder
you are entitled to receive additional shares on account of the split, as and
when it is proposed by the board of directors and approved by shareholders in
general meeting of the company. These are credited to your demat account.
In case of
physical certificates, depending on the board resolution, you may have to
surrender your existing certificates and the new certificates with the changed
face value will be issued to you.
Points to
remember:
Equity shares, like any other asset, derive their value from the price at which others are willing to buy or sell it. In the absence of willing buyers / sellers, shares of a company can become illiquid. The risk of illiquidity is inherent in investing in shares over which SEBI does not have any control.
You will earn return on your investment in shares only if the company performs well. Unlike bank deposits, there are no guaranteed returns in investing in shares.
In some instances, the promoter of the company or an acquirer or the company himself may want to buy the shares of the company to increase their shareholding or buy back shares to enable delisting the company from the stock exchange.
In such cases,
they are required to make an open offer to buy shares from all the
shareholders. You have the option to tender your shares in response to such
offers. You will receive money from the acquirer, if your shares are accepted.
Source:
Securities and Exchange Board of India
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