Read the post about stock splits: Stock Splits on the Stock Exchange
In the previous post, I have explained a lot about stock splits. Now, what is the purpose of issuers doing a stock split? The answer is: Increase the liquidity of the company's shares. With the share price being split (the price is lower), it will be more accessible to retail investors with small funds to buy company shares.
If the stock price is too high, the more funds needed to buy shares, so the higher the stock price, the harder it is for investors to reach. That is why, with a stock split, the company's stock price becomes more liquid.
If the goal is to increase stock liquidity, then what are the benefits for issuers? Will the more liquid shares make the issuer earn more profit?
Absolutely not.
The price of liquid shares has nothing to do with the company's performance. When you think about it, with a stock split, the company actually incurs administrative costs for issuing shares, right? If it's just that the stock is liquid, but there's no effect on the issuer, then why does the company bother doing a stock split?
First, stock split is the issuer's awareness to satisfy shareholders. Indeed, there is no compulsion to do a stock split, but as an issuer (a company going public), issuers should provide more value for shareholders. One of them is if the company's stock price is too high, the company must want a stock split.
Second, with a stock split, the number of public investors in the company will increase (more liquid). Therefore, the stock will become more attractive. If the number of investors in the company increases, and if the issuer's shares become more liquid, the issuer concerned will find it easier to seek new funding through the capital market, for example through a rights issue. Issuers will find it easier to attract investors to participate in issuer funding, so that issuers will find it easier to get fresh funds.
Third, pressure from the authorities (Read: Indonesia Stock Exchange or IDX). IDX always monitors illiquid stocks. Stocks that are illiquid because the stock price is too high, will be given a warning for an immediate stock split. I give one example. Prior to the stock split, PT Multi Bintang Indonesia (MLBI) was the issuer with the most expensive share price on the Exchange. The price reaches IDR 1,000,000 (one million rupiah) per share!
Who would want to buy a stock that is so expensive? It was clear that MLBI's shares were highly illiquid at that time. Therefore, the IDX gave a "warning" to the management of MLBI to immediately conduct a stock split. If you read the news about the "MLBI stock split", you will find many statements from the IDX which essentially state that: "Stocks with high prices must be stock split. And companies that do not want stock splits should be delisted (out of the Exchange)" .
We really cannot conclude whether the MLBI stock split is because it is required by the IDX or because of its own will, only the management of MLBI knows. However, at least the IDX has given a "warning" to MLBI issuers for a stock split. MLBI ended up doing a stock split at a ratio of 1:100.
That is the purpose of issuers doing a stock split. I think you can understand easily.
Stock Chart Before and After Stock Split
The next question, how is the stock price before and after the stock split? Tend to go up or down?
Issuers whose stock splits share prices usually go up early. I also don't know why the trend is up, even though the stock split has nothing to do with the performance of the issuer. One possible reason is that investors are happy that their shares are getting easier to reach, which is why their share prices usually tend to go up.
The stock graph of issuers who have done a stock split is clear. Look at the picture below.
The graph above shows HMSP shares which did a stock split in June 2016. Note, issuers who do stock splits on their charts always look "a bit odd". Because the stock price was originally above quite high, suddenly the next day it fell very sharply (see the picture above). A very sharp drop is then followed by more and more volume (notice the circle sign).
So, before the stock split, the company's stock price will appear high with little volume. After the stock split, the company's stock price will seem to "drop" suddenly and be followed by a larger volume (indicating that the stock is getting more liquid because of the stock split). So, if you find a stock chart like the picture above, you don't have to be confused. The graph can occur because the company took corporate actions, namely: STOCK SPLIT.
What about stock splits? Easy to understand right?
