In this paper we will discuss about stock split. It is basically a myth going around the stock market. The investors think that stock split is profitable for them, which is not the reality. Often the stock traders think that they will be able to double their stocks through stock splits. This is not correct fully, for the individual stock values get lowered after the split.
It can be explained with an example. If a company splits its stock at 2:1 then, it will issue new shares for all the outstanding stocks. Therefore, 50% will reduce the individual share values. As a result, the stockholder may get twice number of stocks than they had earlier, but the total value will remain the same.
Stock splits can occur in different ratios, although the popular are 3:2, 3:1 and 2:1. There is also a chance of reverse split for a stock, but this does not happen frequently. The company may use the reverse stock split to push the small stockholders out.
Sometimes the stock prices go high; therefore, the investors think that a stock split may ease the situation. Stock split do reduce the prices, which enable the investors, especially the beginners, to buy the shares at a low cost.
(1) Sometimes low share prices may result in high liquidity, for low price stocks are often easier to sell.
(2) Stock splits sometimes are treated as an indicator of a bullish market.
(3) Stock splits pave the way for the small investors.
(1) The companies expect more than the actual due to stock splits. So, if the expectations do not fulfill then the confidence of the investors may go down. Therefore, the share prices may further go down.
(2) There is basically no relation between the performance of a company and stock split. So the companies will waste time if they wait for a stock split.