A stock split is a corporate action wherein a company increases the number of existing shares by splitting them and reducing their face value. The primary motive of a split is to increase liquidity and make the stock more affordable to small investors.
Hence, in a 2-for-1 stock split, a new share is issued for every share held by an investor. This means that:
- If there were 1 crore outstanding shares, there will be 2 crore shares post-split.
- The stock price falls to the extent of the split; In a 2-for-1 split, the face value gets halved.
- The face value of shares changes with respect to the split ratio (unlike bonus issues where the face value is unaffected).
- There is no change in market capitalisation of the company or ownership stake and investment value for investors (as is the case for bonus issues). Existing shareholders will have the same amount of money invested, and will own more shares as a result of the split.
How does a stock split affect a shareholder?
Let us understand this better with the 10-for-1 Tata Steel stock split. On 3rd May, 2022, the company announced a stock split where every share of face value Rs. 10 is split into 10 shares of face value Re.1. So if John has 200 Tata Steel shares, he will hold 2000 shares post-split.
Important Dates
- Declaration Date (3rd May)- The day the split is announced to the public.
- Ex-Date (28th July)- The day the shares trade without the benefit of the announced corporate action. To be eligible to receive shares as part of the split, purchases must be made before the ex-date.
- Record Date (29th July)- All shareholders of as per company records on this date (29th July) will receive shares as part of the split.
- Credit Date- The day the split shares reflect in the Demat accounts of eligible shareholders.
Impact
- To be eligible to receive shares during a stock split, you must hold the shares in your Demat account as on the Record date. In other words, the shares must be bought before the Ex-date settled in your account by the Record date.
- In this case, shares must be purchased by 27th July (as the shares start trading ex/without benefits from 28th July) for it to be settled in your Demat account by the Record date i.e., 29th July.
- If you hold shares of Tata Steel in your Demat account on 29th July (record date), your existing shares will be split into 10.
- After the Record date, since the face value of the share decreases, so does the market price. This increases liquidity and allows smaller investors to participate.
- The ISIN of shares that have undergone a stock split must be changed, Hence, you can view your updated holdings only after this.
- The new average rate will reflect in your account immediately, but it will up to 2 days for the quantity of split shares to be credited to your Demat account. Till then, your portfolio may show an incorrect loss due to this mismatch. As soon as the Depository credits these shares to your Demat account, the holdings value will be automatically re-adjusted.
- Similarly, your P&L for the Period Statement will take some time to be updated.
How are F&O contracts adjusted for a stock split?
To adjust F&O contracts, an adjustment factor is calculated in proportion to the split and contracts are modified accordingly.
Since Tata Steel underwent a 10-for-1 stock split, the adjustment factor is 10. Hence, the initial lot size of 425 is revised to 4250 (425 x 10)