Investing and pursuing education in school or college are pretty much the same. That is because you need to keep on learning; to understand the stock market in general, the development of the companies whose stocks you own or the ones that you want to invest in, and any external policy that can affect the stock movements.
As an investor, one thing that you might face is when an issuer issues a stock split. What is a stock split, and what do you need to know? Find out the answer in this article!
Stock Split Definition
Stock split is a corporate issuer’s (or company which trades its stocks in the stock exchange) action to increase the number of its outstanding stocks in the market. This action, which is mostly implemented by blue chip stocks, is done by dividing a share of stock with the ratio agreed by the company’s board of directors.
For example, you have 1 lot (100 stocks) of issuer A’s stocks at Rp20.000 per stock. If that issuer issues a stock split with 1:2 ratio, the number of shares of stocks upon that issuer will be 2 lots (200 stocks), but, the price per stock will be Rp10.000.
If it is calculated, the total value of your stock ownership upon that issuer before and after the stock split remains the same. Meaning, the market capitalization of the issuer will not change after the stock split. Then, why do they issue a stock split?
The Reasons For Stock Split
According to some sources, the main reason why an issuer issues a stock split is to increase the stock’s liquidity (or the potential of an asset whether it can be quickly bought or sold at its fair price) of the company. Beside that, according to Investopedia, psychological factors are also one of the reasons for the stock split.
A stock split can make the stock price seem cheaper and more affordable for retail or beginner investors. Therefore, the issuer can gain capital from “types” of investors who never own its stocks. In other words, this corporate’s action has the potential to expand the market of that issuer.
Things You Need To Know If The Issuer Issues A Stock Split
Potential capital gain
It was mentioned before that a stock split does not change the total value of your stock ownership upon an issuer. Even so, you still can earn profits in the form of capital gain from this corporate’s action. What is capital gain?
Capital gain is investment profits you will earn when the issuer’s stocks you own increase at a later date. This would likely happen, because when an issuer issues a stock split, the demand rate from the investors tends to increase. As a longtime investor, you will earn profits as the issuer’s stock price increases in line with the high market demand.
Easier transaction and diversified portfolio
The stocks of each issuer are sold in lots (100 stocks). Meaning, to buy the issuer’s stocks, you have to put up capital at one share of stock multiplied by 100. If the price per share of stock is quite high, then the lot price will be high as well. This may be one of the benefits you will get if an issuer issues a stock split. When the stock split is issued, the price per share of stock will ‘fall’ considerably. Therefore, it is easier for you to ‘release’ or sell the issuer’s stocks at their fair price or when you want to diversify your portfolio.
On the other hand, a stock split can potentially increase the volatility of stocks. What does that mean? Volatility is a measure of stock price fluctuation in a short period due to multiple factors. In other words, a stock split may allow the stock prices to move freely – either moving up or down dramatically – in a short period. If the prices fall, you may suffer losses as you have a capital loss.
So that is what a stock split means and things you need to know about it. Even if this corporate’s action has its plus and minus points, there is no harm in gaining more knowledge on investments, isn’t it?
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