How to make quick gains during the company stock split?
You might be investing in large cap stocks, mid-cap and small cap stocks to make 20% to 30% returns in a year. However, identifying best stocks to get such returns is not that easy. One of the quickest ways to make money in the stock market is during the company stock split. Do you know that in 2014, once the company has announced stock split, some of the companies share price rised as high as 225%. What is company stock split? How to make quick gains during the company stock split? Why do companies do stock split? Is the party over in 2014?
What is company stock split?
Company face value of the share price is Rs 10 per share. However company share prices may reach very high say e.g. Rs 1,000 per share based on the reputation and valuation of the company financials. In such case, it would not attract small investors to buy such shares. During such time, companies would adopt a strategy called “stock split” where such face value is reduced to less than the current face value. In above e.g. Rs 10 per share face value is reduced to say Rs 5 per share or Rs 2 per share. Means every existing investor would get more shares without buying them. Companies generally want to do this to attract small investors and for several other reasons.
How investors gained in 2014 after announcing the company stock split?
In 2014, there almost 70+ companies announced stock split. Some of them gained as high as 225% once the announcement happened. Here are the quick statistics:
- 70+ companies announced stock split in 2014 till now
- 60+ companies have announced record date. The record date is the date where existing shareholders as of that date would get additional shares due to stock split.
- Out of 60+ companies announced record date, there are 38 companies where stock split is already done.
- From this 38 companies, there are more than 70% of the companies where it gave decent returns in share price of 30%+. While some have given 225%, some gave just marginal returns. The majority of the returns are from small cap companies.
- Some of the companies which gave decent returns after announcing a stock split are indicated below:
- Premier Cap Serv – 225%
- Green Crest – 220%
- JBM Auto – 150%
- Rekvina Labs 150%
- Orosil Smith – 140%
- Alkyl Amines – 100%
What are the top reasons why companies do stock split?
- Companies generally do stock splits to increase the number of shares without raising fresh capital. When stock split is done from a face value to lower face value, the share price of the stock would fall. This makes a company cheaper from an investor perspective.
This is explained with an example: X company has share price of Rs 1,000, whereas its face value is Rs 10 per share. Now it announces stock split of Rs 10 per share to Rs 2 per share. Means, its market price which is Rs 1,000 would automatically fall to Rs 200 per share on record date as investors would get 5 shares in lieu of 1 share is held with him. Investor total value still remains same. Company is not receiving any fresh investments from investors.
- The company would do this to catch investor attention, especially retail investors and small investors.
e.g. ICICI Bank share price is Rs 1,570 whereas Karnataka Bank share price is Rs 118. Investors perception could be that ICICI Bank share price is high.
- Company would do this during the market boom where share price might be zooming and reaching new highs.
Continuing above example, ICICI Bank share price was Rs 950 one year back. Now currently trading at Rs 1570, almost 70% high during this market boom.
- Company feel that only large investors are investing and participating in its shares.
- To increase liquidity by pumping less priced shares.
Is the party over in 2014?
There are several large cap / blue chip companies which announced stock split. However, some of them have not yet announced record date. Majority of such companies are banks which are SBI, ICICI, Axis Bank, Bank of Baroda, Punjab National Bank and Canara Bank. Since majority of the banks are trading in 4 digit share price, many investors feel these are high priced. Some stocks like Punjab National Bank share price raised by more than 50% after stock split announcement. One of the reasons could be a stock market boom now. Keep an eye on such companies and their share price before you decide to buy. One cannot decide what is the threshold limit to which such company stock price can zoom. It could be marginal or it could be 30% or it could be 200%. Very difficult to predict.
Look for stocks which are fundamentally good. If you are planning to buy such stocks and when there is stock split announcement, you can include such stocks in your “immediate buy” list. This can give you double Dhamaka of share price appreciation in long term + stock split appreciation in the short term. Also, if you are looking for short term gains in stock markets, investing in companies that are announcing / announced stock split could be a good bet.
If you like this article, please share this on your Facebook or Twitter. This would be a special gift which you would be giving to our blog.
How to make quick gains during the company stock split