Introduction

Understanding financial terms and concepts like stock split and buyback of shares is essential for investors to make informed decisions. These corporate actions are strategies that companies use to manage their share prices, improve liquidity, and return value to shareholders. For investors, understanding these strategies is key to assessing their potential impact on investments and making informed choices.

stock split and buybacks each serve distinct purposes. While a stock split aims to make shares more affordable and accessible, buybacks are intended to reduce the number of outstanding shares, often boosting the share price and earnings per share (EPS). Both strategies have their advantages and drawbacks, and knowing when and why a company opts for either can offer valuable insight into its financial health and market strategy.

This blog delves into the fundamentals of stock split and buybacks, illustrating their effects with real-life examples from the Indian market. Whether you’re a seasoned investor looking to optimise your portfolio or a new entrant trying to understand how these strategies can impact your holdings.

What is a Stock Split?

A stock split is a corporate action where a company divides its existing shares into multiple shares to boost the stock’s liquidity. Although the number of shares increases, the total value of shares held by the shareholders remains the same, as the split does not impact the company’s market capitalisation.

stock split, including those listed on the NSE stock split records, provide a clearer view of their impact on the market.

For example: If you own 1 share of a company valued at ₹1,000, a 2-for-1 stock split would give you 2 shares priced at ₹500 each. The value of your investment remains ₹1,000.

Definition and Purpose

A stock split is a corporate action where a company divides its existing shares into a larger number of new shares. By increasing the number of shares, a company aims to boost the stock’s liquidity, making it more accessible to a wider range of investors. This increased accessibility can potentially enhance the stock’s price and overall market appeal.

You may also want to know What is Dividend in Stock Market?

How stock split Work

When a company decides to split its stock, it issues a certain number of new shares to existing shareholders for each share they already own. For instance, in a 2-for-1 stock split, a shareholder who owns 100 shares would receive an additional 100 shares, resulting in a total of 200 shares. Although the number of shares increases, the total value of the shareholder’s investment remains the same. This is because the stock price is adjusted proportionally to reflect the increased number of shares.

Reasons for stock split

Companies may choose to split their stock for several reasons:

1. Increased Liquidity: By making the stock more affordable, a stock split can attract more investors and increase trading activity.
2. Improved Affordability: A lower stock price can make the stock more accessible to individual investors who may not have been able to afford it at the higher price.
3. Boosted Stock Price: A stock split can potentially boost the stock’s price by creating a perception of increased value and attractiveness.
4. Simplified Stock Options: A stock split can make it easier for companies to issue stock options to employees and executives.

Types of stock split

There are several types of stock split, including:

1. Forward Stock Split: A forward stock split is the most common type, where a company issues a certain number of new shares to existing shareholders.
2. Reverse Stock Split: A reverse stock split, also known as a consolidation, is where a company reduces the number of outstanding shares by consolidating them into fewer shares.
3. Stock Dividend: A stock dividend is a type of stock split where a company issues additional shares to existing shareholders as a dividend.

Impact on Shareholders

A stock split can have both positive and negative impacts on shareholders:

1. Increased in Number of Shares: The total value of their investment remains the same, but shareholders receive more shares in their portfolio.
2. Lower Stock Price: The stock price may decrease after a stock split, but the total value of the investment remains the same.
3. Increased Liquidity: A stock split can increase trading activity and make it easier to buy and sell shares.
4. Potential for Increased Value: A stock split can potentially boost the stock’s price and increase the value of the investment.

Benefits of Stock Split

Understanding the benefits of stock split helps investors see why companies opt for this strategy.

1. Improved Liquidity: More shares mean higher trading volumes, making it easier to buy and sell shares.
2. Affordability for Retail Investors: By reducing the price per share, stock split make shares more accessible to small investors.
3. Psychological Effect: A lower share price often attracts more buyers, potentially driving up the demand.

Real-Life Examples of stock split in India

Several Indian companies have undergone stock split to make their shares more attractive. Here are a few notable cases elaborated:

• Tata Steel: In 2022, Tata Steel announced a 10-for-1 stock split, significantly increasing liquidity. This move made the shares more affordable for retail investors, leading to higher trading volumes and broader market participation. By splitting each share into 10, the company aimed to boost market accessibility and attract a wider range of investors. The increased trading volumes following the split demonstrated the success of this strategy in enhancing the stock’s appeal and reinforcing investor confidence.
  
• Infosys: The IT giant, known for its consistent growth and innovation, has conducted multiple stock split over the years. The company notably executed a 1:2 split in 2014, halving the share price and doubling the number of shares in circulation. This strategic move aimed to keep the stock price within an attractive range for retail investors, boosting demand and trading activity. The enhanced liquidity that followed the split reinforced Infosys’s reputation as a shareholder-friendly company and contributed to sustained investor interest.
  
• ICICI Bank: ICICI Bank executed a 1:5 stock split to make its shares more affordable for smaller investors. This strategy was part of the bank’s broader initiative to widen its investor base and improve share liquidity. The stock split resulted in a significant uptick in trading volumes as more investors were able to participate in trading at a lower price point. This increased market participation helped boost the overall visibility and attractiveness of ICICI Bank shares, showcasing its effectiveness.

Stock Split Calculator

Using a stock split calculator helps investors anticipate changes in share quantity and price post-split.

A stock split calculator is a helpful tool for understanding how your shares will be affected by a stock split. By entering the current share price and the split ratio, investors can estimate the new share price and quantity.

Example Calculation: Current share price = ₹1,000 Split ratio = 2-for-1 New share price = ₹500 New number of shares = 2 (for every 1 share held)

What is a Buyback of Shares?

A Buyback of Shares, also known as a share repurchase, is when a company buys its own shares from the market. Companies can buyback shares through a tender offer or the open market. A tender offer involves the company proposing to buyback shares at a premium over the current market price. This action reduces the number of outstanding shares and can positively impact the share price and earnings per share (EPS).

Advantages of Buyback of Shares

1. Increase in Share Value: By reducing the supply of shares, a buyback can lead to a higher share price, often offering a price higher than the current market price to incentivise shareholders.
2. Improved Financial Ratios: A decrease in outstanding shares enhances EPS and other financial metrics.
3. Signal of Confidence: Companies often use buybacks to signal that they believe their stock is undervalued.

Recent Examples of Buyback of Shares in India

Buybacks are used by Indian companies as a strategic tool to enhance shareholder value. Companies can also buyback shares from the open market, reducing the number of available shares and potentially increasing the value of the remaining stock. Here are detailed instances:

• Wipro: In 2023, Wipro conducted a share buyback worth ₹12,000 crore. This buyback was part of the company’s strategy to return surplus cash to shareholders, reflecting management’s confidence in the company’s strong fundamentals. Post-buyback, Wipro’s stock price appreciated significantly, showcasing the market’s positive response and the effectiveness of the buyback in enhancing shareholder value.

• TCS (Tata Consultancy Services): TCS has consistently engaged in share buybacks as a way to reward its shareholders and optimise its capital structure. The most recent buyback was worth ₹18,000 crore in 2022. This move demonstrated TCS’s robust cash flow and commitment to shareholder returns. The buyback helped reduce the number of outstanding shares, resulting in an increase in EPS and boosting investor confidence.

• Infosys: Infosys completed a significant Buyback of Shares in 2022, amounting to around ₹9,200 crore. This buyback was aimed at improving shareholder returns and enhancing the company’s EPS. Following the announcement and completion of the buyback, Infosys’ stock witnessed a notable increase in value, affirming the market’s favorable view of the strategy.

Upcoming Buyback of Shares

Monitoring upcoming Buyback of Shares can present lucrative opportunities for investors seeking to maximise their portfolio gains.

Investors should keep an eye on the upcoming Buyback of Shares as companies often announce buybacks to improve their share price performance. Monitoring the BSE buyback date and NSE announcements can provide valuable insights.

How to Check BSE Buyback Date

Staying informed of the BSE buyback date ensures that investors can act promptly on buyback opportunities.

The buyback dates and details are generally available on the company’s official website, the Bombay Stock Exchange (BSE), and National Stock Exchange (NSE) websites. For the latest updates, investors should follow announcements and news releases.

Benefits and Drawbacks of stock split and Buybacks

stock split:

Pros:

• Increased liquidity
• Better accessibility for small investors

Cons:

• No direct financial benefit to shareholders (the value of shares remains the same)

Buybacks:

Pros:

• Higher share value
• Improved EPS
• Sign of management’s confidence
• A tender offer allows shareholders to submit their shares within a specified timeframe, often at higher prices than the current market value.

Cons:

• Could be a sign that the company lacks better investment opportunities
• Short-term focus over long-term growth

Conclusion

stock splits and share buybacks are important tools used by companies to manage their share prices and return value to shareholders. Understanding their mechanics, benefits, and drawbacks helps investors make strategic decisions aligned with their financial goals. Keeping track of upcoming stock splits and buybacks in the Indian market can offer timely investment opportunities.

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