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How to Benefit from Stock Splits?

Posted By On 12/08/2008 11:39:00 AM Under
1. Stock split is the procedure of conversion of stocks with high face value into stocks of a lower face value.  In layman language one can state that it is like getting change in Indian parlance or we can state that it can be equated with the conversion of a 10 Rs note to say 10 notes of 1 Rs each. However it does not have any effect on the value of the shares initially.

2. Since these days all stocks are dematerialised and thus one is auto credited with increased number of shares in the account. The point to note here is that the need for stock split arises due to high value of a single share and thus due to psychological barrier people do not buy high priced shares.


3. The moment stock split occurs the floating number of shares in the market increases and thus liquidity and volume increases which leads to increase in price due to increased activity in stock. Thus to get optimum benefit one must undertake the below action:
(a) Buy stock before the record date for the stock to be split.
(b) As a short term strategy one must exit the stock on the day the stock split becomes effective in stock exchange as in the euphoria of the market due to high liquidity one is going to get good returns.

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