Six steps to understanding a stock split!

Last updated on: May 13, 2005 07:54 IST

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ure does sound funky, but a stock split happens quite often. What it means is rather direct: your stock actually gets split. To understand what a stock split is and how it impacts you, read on. 1. Understand what a share is Any business has a lot of assets: machinery, buildings, land, furniture, stocks, cash, investments. It will also have liabilities. This is what the company owes other people. Bank loans, money owed to people from whom things have been bought on credit, are examples of liabilities. Take away the liabilities from the total assets and you are left with the capital. Assets - Liabilities = Capital Capital is the amount that the owner has in the business. As the business grows and makes profits, it adds to its capital. This capital is subdivided into shares. So if a company's capital is Rs 10 crore (Rs 100 million), it could be divided into 1 crore (10 million) shares of Rs 10 each. If you own 100 shares of Gujarat Ambuja [ Get Quote ] Cement, for example, you own a very small part - since Gujarat Ambuja has millions of shares -- of the company. You own a share of its assets, its liabilities, its profits, its losses, and so on. y 2. How is this share valued? If the company has divided its capital into shares of Rs 10 each, Rs 10 is called the face value of the share. When the share is traded at the stock market, however, this value may go up or down, depending on the supply and demand for the stock. So the price of Company X's shares will go up and down, depending on the demand for Company X's stock. What's in a share? Money!

These shares are then given free of cost to the investors. two. But that is where the similarity ends. A few weeks later. So it will take one share of Rs 100 and make it two. But the number of shareholders is the same. A stock split is somewhat like a bonus -. the company may decide to convert it into shares. How is 5 things you must know before buying shares it different from a bonus? I had mentioned that cash reserves form part of the company's assets. the price will fall. . 4. the number of shares you own increases at no cost to you. If the number of shares in a company is multiplied by its market value. So If now. understand a company's The company may want to change the face value. the price will go up. the shares will start trading ex-split on the stock exchanges.If everyone wants to buy the that when a Rs 10 stock is split into two Rs 5 shares. So. of each you will share now is Rs own 50. the result is market capitalisation. So the share with a face value of Rs 10 may be quoted at Rs 55 (higher than the face value). y 3. If nobody wants to buy them and many want to sell the shares. or even Rs 9 (lower than the face value). the number of shares you hold doubles at no cost to you. It is just that the number of shares they own has doubled. the number of shares have increased. The value of a share in the market at any point of time is called the price of the share or the market value of a stock. basically. y 5. When these reserves increase. Who will get the additional shares? The company announces the split ratio on a particular date called the record date. you the owned face one value share. All shareholders whose names appear on the company's records as on the record date will be eligible for the additional shares. Now The face you value will of How to make money in shares what shares a stock may be split Rs is 100. So when you get a bonus.

The stock was Rs 1. How does this impact you? In one way. it had moved up from around Rs 870 to Rs 1. One month before the split. it will now quote at Rs 100 (since the face value is now Rs 50). you have reason to celebrate when you get a bonus. on April 5. The Gammon India [ Get Quote ] stock split on March 15 led to the face value of the stock going down from Rs 10 to Rs 2. What happened to the price of the stock? It was Rs 451 before the split and adjusted to Rs 90 after the split. For example. the face value of the shares of Rs 100 will now be Rs 50 (above example). In a stock split. The face value never changes for a bonus shares. Do note.A bonus is a free additional share. More investors may want that stock since they can afford it. Those who could not afford to buy the shares at Rs 200 may now be able to buy it at Rs 100. No reason to celebrate when your stock is split. from around the Rs 400 level to Rs 451 before the split. however.235. J B Chemicals & Pharma split the face vaue of its stock from Rs 10 to Rs 2.235 before the split. you will be able to afford them or at least get them cheaper! Sulagna Chakravarty . nothing has changed. It is like cutting an eight-inch pizza into 12 slices from four slices before. Make money with shares For instance. The stock had moved up from Rs 637 to Rs 668 in the month before the split. But if you want to buy the shares of a company which are frightfully expensive. Balrampur Chini [ Get Quote ] split the face value of its stock from Rs 10 to Re 1 on March 23. sending its stock down from Rs 681 before the split to Rs 68 after it. But if you want to buy more shares. coming down to Rs 247 afterwards. by a four -for-one split. But this is just theory. A stock split is the same share split into two. Sometimes. if you are an investor in the company. the number of shares increases but the face value drops. you can now buy them for less. y 6. The stock did go up. There is no other change in the company. investors got four new ones. So if the share was quoting at Rs 200 (when face value was Rs 100). it is good news because now. Chances are the stock may quote at Rs 120 instead of quoting at Rs 100. So a stock split is just a technical change in the face value of the stock. the stock price of a company goes up after a stock split because the demand for those shares increase. So for every one stock you held.

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