Stock Splits
A stock split is completely different from a bonus issue of stocks. A bonus issue of stocks results in an increase in the equity capital of a company because through a book entry money is transferred from its reserves to its equity capital. In a stock split, the existing stocks of the company are simply split into stocks which have a smaller face value, or par value. Stock splits do not in any way increase or reduce the company's equity capital.
For example, let us take the stock split of XYZ Company whose stocks have a par value of $0.25 per stock. Suppose the
company splits its $0.25 stock into five stocks with a par value of $0.05 each. If the pre split price of the stock was $100 and the stock is split five for one, then, theoretically speaking, the price of the new (split) stock should be $25. The company's net assets or equity capital does not undergo any increase or decrease. A stock split benefits the investor because the stock becomes cheaper in price. This invariably results in attracting more buyers with a consequent increase in liquidity and a proportionately higher post split price. It has therefore been observed that the post split price of the stock that undergoes a stock split does not fall to its proportionate level compared to its pre split price.
Take the case of Wipro whose stocks with a par value of $0.25 per stock were split into five stocks with a par value of $0.05 each . It's pre split price (after adjusting for the split) was around $35 per stock, had risen to $55 per stock.
|
Equity