Value being snubbed as split craze grips CSE
View(s):Investors are acutely aware of stock splits these days, thanks to many firms announcing them from earlier this month.
A stock split is when a firm issues more shares of stock to its shareholders without reducing the value of their stakes.
Technically, the split does not add a cents’ value to the shareholders but increases the number of shares by issuing more shares to the shareholders. A rally in share price is the biggest catalyst for companies to split stocks.
So, the share splits are a mechanism to increase the liquidity in listed firms and investors should recognise that only the price per share changes with stock splits; the company’s value does not.
Almost always investors get animated about stock splits, but that shouldn’t be the case, since they don’t change the value of an investment or reflect any modification in the company’s fundamentals.
To put it in perspective, a 4 pound cake is still that whether it’s sliced into four, eight, or 16 pieces. As such, owning 100 shares of a stock that splits 2-for-1 will see a trader having the same percentage of shares in the company. The ownership remains the same.
If a stock leaps post-split, it’s merely psychological. Despite the basic value of the stock not changing, after the split many investors buy as they feel they are getting a lower price, and this tends to drive the price of the post-split stock higher.
At least 14 Hayleys’ related firms announced splits in the past two months. Some splits with shares that aren’t so valuable may also be announced, analysts predict.
One share was subdivided into 4,500 in May 2020 in Industrial Asphalts PLC which has risen exponentially from a split-adjusted low of 6 cents a year ago. A 1 for 4 rights issue was subsequently held in August 2020.
A second analyst added that share splits are good when the market is moving up but equally bad when the market is moving down. “It increases liquidity but also the volatility of a stock. Also it increased your ego.”
Many analysts point out that a split cannot be used as a manipulative tool. They noted that the share split cannot be treated as a way to increase share prices. It will mislead the market – especially the newcomers, according to many.
“A share split is price sensitive information in today‘s context. Immediately prior or after the announcement of the share splits all prices of those shares increased by a minimum of 50 per cent. It will be wise to find out if anyone indulged in insider dealing,” a third analyst pointed out.
The capital market regulator is more than aware, sources said.
The directors are the ones who decide on the share split and if they buy shares, it has to be intimated to the Colombo Stock Exchange (CSE) which in turn will be disclosed to the market by the CSE. If they traded on the information prior or immediately afterwards, it will be an offence.
However, that is recorded information. Those in the ‘know’ of the share split can get their acquaintances to trade on the shares. This happens all the time.
For new investors a stock split announcement is a call to buy, since a lower price per share means buying at lower prices.
“It is important to note that the shares will adjust to ‘realistic price’ after the split when they start trading. In a bull stock market, the share split will increase the prices of shares. But once the market is saturated, the prices will come down faster than they went up,” an analyst observed. (DEC)