Help required on Stock Split

Hi Friends,

I am sure this is a off repeated question, but would be happy to get a answer.

I am writing a small program to carry out Stock Split. I could write this general formula for a Stock Split.

like New Price = Existing Price / Split Ratio
New Volume = Existing Volume * Split Ratio.

Now why the confusion in me.. If the bonus or stock is split 1:1 everything is fine. But, what about split ratio some times they give for Every 2 Shares, 3 new Shares or for 5 shares they give 7 Shares?

Just having doubt, how to split the Price and Volume in such a case.


Satya

The split ratio in those two cases will be 2/5 and 5 /12, not 2/3 and 5/7.

Easy to figure out ... remember the market cap will remain unchanged after split.

As for volume, why is that relevant ? Volume changes on daily basis (sometimes drastically) even in absence of split. But by and large, no of shares traded daily (e.g. post 1:1 bonus) will double, since value wise daily 'business' remains same as pre bonus

Clear ?

AGILENT

Agilent,

It is more confusing now. anyway, let me clearly explain you, why i need this.

When charting the EOD data, each bar will represent OHLC of a particular day.

Post Stock Split, the charting gets haywire because, the price falls dramatically.

In this case, if we need to have a continuous chart, we need to split the pre stock split data, right?

for 1:1 bonus, there is no problem. for example

lets say Infosys trading on 2200 today, if Infosys issues 3 bonus shares for every 2 held, what would be the price? I am looking for a mathematical forumla.

for 1:1 bonus, simply divide the Price by 2 and Multiply the Price by 2.

but for bonuses in the ration of 2:3 and 5:7, how shall i carry it out is the question.

The softwares like MetaStock, AmiBroker have provision to specify split ratio and they carry out it with ease i.e dividing the price and multiply the volume.

Hope I am clear

Satya

Satya

I thought it was clear

The ratio will have the previous no of shares in the numerator (e.g. 1) and new no of shares in the denominator ( 1+1) ie. 1/2 in case of 1:1 bonus, your example

Likewise in case of a '3 for 2' bonus, it will have 2 upstairs and 5 downstairs , ie 2/5.

Whats so complicated ?

something, I found on the Investopedia website. looks like it makes sense.

Understanding Stock Splits
March 11, 2005 | By Investopedia Staff, (Investopedia.com)

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Say you had a $100 bill and someone offered you two $50 bills for it. Would you take the offer? This might sound like a pointless question, but the action of a stock split puts you in a similar position. In this article we will explore what a stock split is, why it's done and what it means to the investor.


What Is a Stock Split?
A stock split is a corporate action that increases the number of the corporation's outstanding shares by dividing each share, which in turn diminishes its price. The stock's market capitalization, however, remains the same, just like the value of the $100 bill does not change if it is exchanged for two $50s. For example, with a 2-for-1 stock split, each stockholder receives an additional share for each share held, but the value of each share is reduced by half: two shares now equal the original value of one share before the split.

Let's say stock A is trading at $40 and has 10 million shares issued, which gives it a market capitalization of $400 million ($40 x 10 million shares). The company then decides to implement a 2-for-1 stock split. For each share shareholders currently own, they receive one share, deposited directly into their brokerage account. They now have two shares for each one previously held, but the price of the stock is split by 50%, from $40 to $20. Notice that the market capitalization stays the same - it has doubled the amount of stocks outstanding to 20 million while simultaneously reducing the stock price by 50% to $20 for a capitalization of $400 million. The true value of the company hasn't changed one bit.

The most common stock splits are, 2-for-1, 3-for-2 and 3-for-1. An easy way to determine the new stock price is to divide the previous stock price by the split ratio. In the case of our example, divide $40 by 2 and we get the new trading price of $20. If a stock were to split 3-for-2, we'd do the same thing: 40/(3/2) = 40/1.5 = $26.6.

It is also possible to have a reverse stock split: a 1-for-10 means that for every ten shares you own, you get one share. Below we illustrate exactly what happens with the most popular splits in regards to number of shares, share price and market cap of the company splitting its shares.



What's the Point of a Stock Split?
So, if the value of the stock doesn't change, what motivates a company to split its stock? Good question. There are several reasons companies consider carrying out this corporate action.

The first reason is psychology. As the price of a stock gets higher and higher, some investors may feel the price is too high for them to buy, or small investors may feel it is unaffordable. Splitting the stock brings the share price down to a more "attractive" level. The effect here is purely psychological. The actual value of the stock doesn't change one bit, but the lower stock price may affect the way the stock is perceived and therefore entice new investors. Splitting the stock also gives existing shareholders the feeling that they suddenly have more shares than they did before, and of course, if the prices rises, they have more stock to trade.

Another reason, and arguably a more logical one, for splitting a stock is to increase a stock's liquidity, which increases with the stock's number of outstanding shares. You see, when stocks get into the hundreds of dollars per share, very large bid/ask spreads can result (see Why the Bid/Ask Spread Is So Important). A perfect example is Warren Buffett's Berkshire Hathaway, which has never had a stock split. At times, Berkshire stock has traded at nearly $100,000 and its bid/ask spread can often be over $1,000. By splitting shares a lower bid/ask spread is often achieved, thereby increasing liquidity.

None of these reasons or potential effects that we've mentioned jive with financial theory, however. If you ask a finance professor, he or she will likely tell you that splits are totally irrelevant - yet companies still do it. Splits are a good demonstration of how the actions of companies and the behaviors of investors do not always fall into line with financial theory. This very fact has opened up a wide and relatively new area of financial study called behavioral finance (see Taking A Chance On Behavorial Finance).

Advantages for Investors
There are plenty of arguments over whether a stock split is an advantage or disadvantage to investors. One side says a stock split is a good buying indicator, signaling that the company's share price is increasing and therefore doing very well. This may be true, but on the other hand, you can't get around the fact that a stock split has no affect on the fundamental value of the stock and therefore poses no real advantage to investors. Despite this fact the investment newsletter business has taken note of the often positive sentiment surrounding a stock split. There are entire publications devoted to tracking stocks that split and attempting to profit from the bullish nature of the splits. Critics would say that this strategy is by no means a time-tested one and questionably successful at best.


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Factoring in Commissions
Historically, buying before the split was a good strategy because of commissions that were weighted by the number of shares you bought. It was advantageous only because it saved you money on commissions. This isn't such an advantage today because most brokers offer a flat fee for commissions, so you pay the same amount whether you buy 10 shares or 1,000 shares. Some online brokers have a limit of 2,000 or 5,000 shares for that flat rate, but most investors don't buy that many shares at once. The flat rate therefore covers most trades, so it does not matter if you buy pre-split or post-split.

Conclusion
The most important thing to know about stock splits is that there is no effect on the worth (as measured by market capitalization) of the company. A stock split should not be the deciding factor that entices you into buying a stock. While there are some psychological reasons why companies will split their stock, the split doesn't change any of the business fundamentals. In the end, whether you have two $50 bills or one $100 bill, you have the same amount in the bank.

Also, Agilent, thanks for your replies. It is much clear for me now.

I could do my programming stuff now.

Satya

You are welcome ... but just remember ... what we call 'bonus' in India is called 'split' in US , and what we call split here is non existent in US , because they do not have the concept of par value.

Look up the other threads on splits ... lots discussed and argued

AGILENT

On the contrary,

I think what is know as 'Bonus' in India does not exist in US markets.

They certainly have Stock Splits - which work just the way as they do in the Indian markets.

First understand the meaning of split/bonus in M:N ratio - M shares given for every N existing shares.
This applies both for splits and bonuses.

For ex.-
2: 1 Split is- 2 share(after split) for every existing 1 share.
So total no. of shares becomes 2.
Often aforesaid split is represented by 1:1 and gives the same result , but is erroneous.

2:1 bonus- 2 shares as bonus given for existing 1 shares.
here total no. of shares becomes 3.

recently Rajesh Expore has given 2:1 split and 2:1 bonus simultaneously.

See what shall happen if u have10 shares.
stocks shall split first and for every share u shall get 2 so total shares shall be 20.
Now u shall get bonus 2:1,so for 20 shares u shall get 40 shares as bonus on 20 shares.
So total no. of shares u shall have 20+40=60.