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Hi ! Can a stock be split if the face value is Rs 1? Moreover, is it better to invest in stocks which have face value of Rs 10, where we can expect splits in future? How does a company split if the face value is 1? What options do they have? Can you explain this scenario? - Arun Paulus.
The lowest face value of a stock is Re 1, which means that the company cannot opt for a stock split if its face value is already Re 1.
The primary objective for a company to consider a stock split is to increase the liquidity of its shares. In a stock split, the equity share capital of a company does not change, hence as an investor, you do not benefit or get harmed in any way.
For example, there's a Company XYZ with a market price of Rs 100 and it has 50,000 total outstanding shares. Mr A invests Rs 5,000 in XYZ and gets 50 equity shares. If the company announces a 5:1 stock split, five new shares will be allotted for each one share held.
After the stock split process completes, the stock will start trading at Rs 20 (Rs 100/5). Mr A will now have 250 shares (50x5). His investment value remains the same, i.e., Rs 5,000 (250 shares x Rs 20).
Irrespective of whether a company opts for stock splits or not, It is important to note that investing in a company solely based on anticipated stock splits is not recommended. Investing in stocks requires a significant amount of time and effort. Before investing in a company, you need to understand its business model, financials, management efficiency, ethical nature of operations, growth potential, valuations, and how it fares against its competitors, among other factors.
If you do not have the time to go through hundreds of pages of an annual report but still wish to embark on the journey of wealth creation, you can consider subscribing to our services on Value Research Stock Advisor.
Suggested read: What to look for in a company before investing?
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