Stock splits and investors happiness By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

September 13, 2016 | Posted by bobbysrinivasan << back to blog

Companies which are listed in a stock exchange may want to split their stock for a host of reasons. For example, a stock which was trading at Rs. 100, two years ago is currently trading at 1000. The company may decide split the old 1 stock for 5 new stocks. The company will take your Rs. 1000 worth stock and replace it with five 200 Rs. stocks (this has nothing to do with the book value but the presence of existing shares will increase 5 fold). For example if I had say Infosys 100 shares worth Rs. 1000 today I will have exchanged it for five 200 shares. The question in the mind of the student as to why this takes place. This is a conversation between a student and his professor.

Student: Professor I was going through the prices in the US market of some of the well-known stocks like Google, Amazon, Microsoft etc., and out of curiosity checked the prices of Berkshire Hathaway (symbol brk.A) and to my amazement that the shore is currently selling for 223.040 dollars per share. In Indian rupee terms it is Rs.1,49,43,680 (Rupees One Crore Forty nine Lakhs and Forty three thousand six eighty) per share. Is this for real?

Professor: Yes. It is for real. The company at any time in the last several decades had no intention to stock split (however they issued Berkshire Hathaway (brk.B) to facilitate ownership for small time investors).

Student: What is a stock split and why does it take place?

Professor: I can explain this concept easily by taking an Indian stock from the Sensex. For example, Infosys which is a darling among the FIIs, DIIs and retail investors the stock has been split atleast five times. In the last two decades what it means is that 100 shares became 200, a few years later, the 200 became 400 and later to 800, 1600 and 3200 and soon overtime. The initial owner who had 100 shares now owns 3200 shares with the possibility of it increasing further. Overtime the person who owns the share has become amazingly rich. I read somewhere that if one had invested10000 Rs. in Wipro in the 1980’s will be worth 600 Crores (please verify).

Student: Professor, you are telling me that I can become rich by identifying good performing stocks with immense growth prospects. What a feeling?

Professor: Of course. This is always true. Look at Apple shares in the US. It has seen phenomenal growth in the last two decades. Go to internet and Bloomberg search. See how to identify good stocks.

Student: Does stock split improve price discovery?

Professor: You bet it is. Look at the increase the number of participants. As more and more investors become mesmerized with the stock performance, they will not hesitate to buy those stocks. You may have read in the papers that the former Infosys Chairman’s driver become a millionaire because of his ownership of the company share.

Student: There are so many interesting informations about companies and their performance. I am glad you are sharing with me.

Professor: With pleasure. Join my wealth management course; you will hear many more successful stories. OK.

Student: Thank you. Professor.

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