2 min read.Updated: 28 Oct 2021, 01:12 PM ISTLivemint
IRCTC stock split: ‘Every time a company announces a stock split, retail investors tend to buy the stock…’, says Zerodha founder
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Starting today, 28 October, IRCTC shares were split in the ratio of 1:5, sub-dividing the face value of the share from 10 per share to ₹2 per share. Zerodha founder Nithin Kamath took to Twitter to explain what a stock split means and does it have any impact on retail investors. “Every time a company announces a stock split, retail investors tend to buy the stock wrongly thinking that the stock has become cheaper," Nithin Kamath said.
“We now have a nudge to inform users. IRCTC has undergone a split. A stock split just increases the number of shares and does not mean a stock has become cheaper. It has no impact on the fundamentals of the company," Zerodha founder.
Every time there is a corporate action like a stock split in #IRCTC today and the stock price drops in adjustment, retail investors tend to buy the stock wrongly thinking that the stock has become cheaper.
Recently, Zerodha launched a new feature called Nudge on their trading platform which will help the traders to learn from their mistakes.
What does the IRCTC stock split mean for investors?
If you had 1 share of IRCTC at a price of ₹4500, you will now have 5 shares at ₹900 every—4 new shares will be credited in 4 days after the stock split. This makes no difference in terms of the value of the stock. It isn’t cheaper just because the price is lower.
A stock split increases the number of shares that are outstanding by issuing more shares to the current shareholders. Stock split decreases the market price of the individual shares, however, does not result in changing the market capitalization of the company.
“Corporate actions like stock split, bonuses, rights issues, increase the number of shares in the company and hence reduce the price of the stock. This makes no difference to the value. It is like having 1 chocolate of 100 gms or 5 of 20 gms each, the value remains the same," said Nithin Kamath.
Corporate actions like stock split, bonuses, rights issues, increase the number of shares in the company and hence reduce the price of the stock. This makes no difference to the value. It is like having 1 chocolate of 100 gms or 5 of 20 gms each, the value remains the same. 3/4
In most cases, it is seen that a stock split tends to result in the appreciation of the stock price. This is because as the stock now appears to be cheaper, there is a higher demand for it from small and retail investors which leads to a rise in the price. It creates a positive approach towards investing in such companies as the stock price that earlier seemed very high becomes available at a good price.
While announcing its first-quarter earnings, IRCTC had unveiled its stock split plans as the board approved the proposal for a 1:5 stock split.
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