Why do you invest in stocks? Capital gains, dividends? Most likely both.
Some of the most attractive dividend + capital gain stocks are also some of the most expensive. For example, MRF, Honeywell, Page Industries, etc.
One share of MRF costs more than Rs 80,000. If you ever thought of investing in these stocks, you are perhaps still building the corpus to get one of these stocks.
What if tomorrow MRF is available at around Rs 8000 per share by some miracle? You will certainly pounce on the opportunity, and you will not be alone.
The miracle that can turn the most unaffordable stocks affordable is called a stock split, or face value split.
Face value split can create an investor frenzy in the market for the stock. However, is it a dividend for the shareholders? What happens if a stock you have in your portfolio announces a face value split? Do you stand to gain anything?
Let’s find out:
What is Face Value Split?
Whenever a firm issues a new stock, its face value is Rs 10 per share in the books of the firm. The price of the equity share, as defined by the firm’s valuation, is different from the book value or face value of the share.
For example, ABC Ltd is listed on the stock exchange with one crore shares with a face value of Rs 10 each and priced at Rs 10,000 per share. The market cap of the firm is Rs 10,000 crores.
If ABC Ltd announces a face value split of 1:10, each share will be split into 10. While it does not affect the value of the firm, it changes the book value of the stock from Rs 10 to Re 1. Also, the firm will now have Ten crore shares (10x more) in the market.
The market cap of the firm will remain the same at Rs. 10,000 crores. However, the share price must come down to Rs 1000 per share.
Meaning of Face Value Split for Investors
As you can see, the face value split does not affect the firm’s value in the market. But it increases the total number of shares proportionate to the split ratio. Similarly, if you had 100 shares of this firm in your portfolio before the split, now you will have 1000 shares without any change in the folio value.
How does it help you? More shares make it easier for the existing investors to liquidate the stocks and for the new investors to invest in them. Thus, the face value split provides liquidity to the shareholders and opportunities for new investors.
For instance, you are holding 100 shares of ABC Ltd worth Rs 10 lakhs. If you want to withdraw Rs 15,000, you will sell at least two shares worth Rs 20,000. That will put Rs 5000 out of the investment.
Also, selling a share worth Rs 10,000 will be more difficult. But, after the face value split, you have 1000 shares of Rs 1000 each. Now, you can sell 15 stocks without worrying about the lost opportunity.
Also, selling 15 shares of Rs 1000 each will be easier as you can find more investors for the firm.
Face Value Split a Dividend?
A dividend is one of the two ways of earning from your stock investments. But face value split changes neither the value of your stock holding nor gives immediate cash in your account.
Thus, it cannot be a dividend. However, it improves liquidity, and more investors can invest in the firm.
Which stock would you like to announce a face value split next?