Stock Splits
A stock split is completely different from a bonus issue of shares. A bonus issue of shares 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 shares of the company are simply split into shares 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 shares have a par value of Rs. 10 per share. Suppose the
company splits its Rs. 10 share into five shares with a par value of Rs. 2 each. If the pre split price of the share was Rs. 5,000 and the stock is split five for one, then, theoretically speaking, the price of the new (split) share should be Rs. 1,000. The company's net assets or equity capital does not undergo any increase or decrease. A stock split benefits the investor because the share 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 share that undergoes a stock split does not fall to its proportionate level compared to its pre split price.
Take the case of Wipro whose shares with a par value of Rs. 10 per share were split into five shares with a par value of Rs. 2 each on 15 October 1999. It's pre split price (after adjusting for the split) was around Rs. 1,284 per share, which, by 31 December 1999 had risen to Rs. 2,522 per share.
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