“Every time a popular stock goes ex-bonus/split & the price drops on ex-date, there is panic or greed among many investors because they think they’ve made a loss or that the stock has become cheaper,” tweeted Nithin Kamath, Founder and CEO, Zerodha.
He took to Twitter to explain what a stock split means and that it does not have any impact on retail investors. He explained that a bonus or a split is like having 2 chocolates of 50 gm instead of 1 chocolate of 100gms. It makes no difference.
A bonus issue or a stock split just increases the number of shares that an investor has. It does not make the stock cheaper or lead to a loss. Usually, the new shares after the happening of a bonus or split are credited to the account of the shareholders within five working days. At the same time, the buy average price and the holding value will be fixed.
In case of a split, the number of shares that are outstanding increases, by issuing more shares to the current shareholders. Suppose an investor had a stock with a face value of ₹ 10 and at a price of ₹ 500 apiece. The company comes up with a stock split in the ratio of 2:1. In this case, the face value of the shares will be revised to ₹ 5 and the share price of the company will drop to ₹ 250 apiece on the ex-date. If an investor held 10 shares before the split, then they will hold 20 shares after it.
Written by Simran Bafna
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