In this post, we will discuss what is stock split and reverse split in the stock market. If a company starts doing well its share price also starts to rise. Sometimes we see a company, say XYZ company started trading at Rs. 200. The previous day it was trading at Rs. 1000. How is it possible?
This is called a stock split. Companies split a stock into few parts for smooth trading operation. Suppose a company got listed in an initial public offering at Rs. 50. Then the company’s business starts to grow and the share price also started rising, from Rs. 50 to Rs. 200 to Rs. 500 to Rs. 1000 and so on. Now the company sees that small and retail traders are getting difficulty in trading an Rs. 1000 share and trading participation is reducing.
Whenever a company lists its share in the stock exchanges, the shares are having a face value. The face value is the initial value of the share certificate. The company can keep any face values starting from Rs. 2 to Rs. 100. Now when a company splits its shares suppose in 5 parts, it divides its face value into 5 parts. So suppose pre-split a company’s face value was Rs. 10, post-split it will become Rs. 2. Before spitting if the company had total 100 shares, after spit they will have 100×5 = 500 shares.
Suppose XYZ company’s share whose face value is Rs. 10, is quoting at Rs. 1000 in the market and the company thinks the share price is high for the retail investors. Hence, they split their shares into 5 parts. The market price of the shares becomes Rs. 200 and the face value becomes Rs. 2. This is what is a stock split. Once the stock is split the participation into the counter increases and traders who were avoiding the share till now, will start trading now. This is because people have a general idea that a 1000 rupees share is costly and a 100 rupees share is undervalued. Actually, this is a misconception, a 100 rupees stock can be more costly than a 1000 rupees share.
Our topic of discussion is “what is stock split and reverse split”. We have already discussed a stock split. We will now discuss reverse split. In a reverse split, suppose company XYZ has 1000 shares of Rs. 15 each. Say they declare a reverse split 5:1. So it will reduce the number of shares. The new number of shares will be 1000 / 5 = 200 shares. The new price of the shares will be 15 x 5 = Rs. 75.
Now why a reverse stock split is done? If a company’s prices become too low and reach the penny stock zone, a reverse split is a way to increase the share price and thus to increase the investor confidence. You can get the information on splits here in Money Control. So we have discussed what is stock split and reverse split. I will be happy to answer your queries on the stock split and reverse stock split in the comments section below.