Share splits rule Stock Market

Adopted from "Bottom Line"

Stock market analysts are predicting more listed firms going for subdivision of shares, which are commonly known as share splits, as they seem to be more interested in offering investors with a ‘wow’ effect than valuations and strong fundamentals.
Analysts are expecting several banks, plantation companies, diversified groups and a few other firms of which, quite ironically the stock prices are not so high, are likely to go for share splits in the coming few months to play on the psychology of investors.
“Share split has become the buzz word in the market. They are mainly done to unlock the value that has been created by a certain stock which goes unnoticed possibly due to the high price. But sometimes it is done to prop up share prices,” an analyst said.
As he pointed out, it is relatively easy for a company to go for a share subdivision than any other instrument because the procedure for a split seems quite simple.
The company doesn’t have to obtain the approval from the CSE but can go ahead with a share subdivision subject to the shareholders’ approval at an Extraordinary General Meeting (EGM).
And also the cost a company has to bear when going for a share split is almost zero as no taxes or stamp duties are involved.
The primary objective of a share split is to make a certain share more affordable to small investors by splitting the share at an agreed ratio.
However, a stock split does not change the intrinsic value of a stock and market capitalisation of it at the time of the announcement of the split.
Following a share split, small investors generally think the stock is now reasonably priced and their buying into the share boosts the demand for the share and drive up the prices.
This can ultimately result in furthering the firm’s market capitalisation.
“The recent share splits have been able to keep the market active and increase the investor participation,” a broker attached to a leading stockbrokerage said.
The latest being the Richard Pieris PLC, a number of firms such as Aitken Spence, Sampath Bank, and Hotel Services Ceylon opted for share splits in bid to be more liquid and attract retailer interest.
However, many are doubtful whether the market can sustain this bull run with these kinds of psychological bait thrown towards the retailers and punters.
“This bull run will get slow down sooner or later as fundamentals will start to play their role in the market. This is obviously short-term boost. With low interest rates and government bringing a lot of firepower to the market through various institutions, it is no brainer that the market is going up,” a stock market analyst, who preferred anonymity, said.
The Colombo Stock Exchange’s benchmark index, All Share Price Index, reached 6,000 points on Thursday.