Many of us would have come across the word stock split which has to do with the company shares. But does it have an impact on your portfolio, if yes, then how? Let's understand in detail about each of the aspects associated with Stock Split and its impact on an investor's portfolio.
What is a Stock Split?
The term 'Stock Split' is a procedure to split the value of shares by keeping the market capitalization untouched but there will be a change in the total number of shares. Almost, all the publicly traded companies do have a set number of shares which will be outstanding. A Stock Split decision by the board of directors is a tactic to increase the number of shares which are outstanding by issuing more shares to the existing shareholders.
For Example: In the case of a 2 for 1 stock split, 1 additional share will be given to each of the shares held by the current shareholders. If a company had 5 million shares outstanding before the split, post stock split of 2 - for - 1 split, it will have 10 million outstanding shares.
- The main motive behind the stock split is to make equities more economical for small investors.
- Stock Split is one of the stock market technique in which a company increases its total number of outstanding shares by issuing more share to the existing shareholders.
- The usual stock split ratios are 2 - for - 1 or 3 - for - 1, wherein each of the existing shareholders will have two or three shares for every share held previously.
- Though there is an increase in the total number of outstanding shares the market capitalization will not change.
- Stock split reduces the price per share of the company.
How Does a Stock Split Impact on your Portfolio?
As an investor, if the shares of the company you are holding have announced a stock split then in short term it will not have any major impact on your portfolio. There will be neither profit nor loss from the stock split and your portfolio will just remain intact.
A stock split announcement boosts the share prices during trading sessions. Apple and Walmart two of the well-known global brands which had announced stock splits. Both of these companies management are known to protect the interest of its shareholders.
For Example, Mr A holds 10 shares of X Company Ltd. X Company Ltd announced a stock split in 2 - for - 1 share. Post this Mr A will have 20 shares of X Company Ltd (A will get 1 share for each of the shares previously held, increasing the shares of the company, reducing the prices of the shares thus keeping his total investment unchanged).