After a Stock Split

As many as 53 companies split their shares in the past one year. Do you know why? Simple. Markets were on a bull run. And that's the best time for companies to lure retail investors to their shares.

Companies experiment with various gimmicks when markets are strong and rising. All sins are forgiven when stocks are going up.

The objective of a stock split is to create liquidity, marketability, and make the shares appear 'cheap' to the retail investor. Splitting during a bull market makes it easy to achieve this objective.

So, of the 53 companies that split their shares in past one year, only ten generated negative returns. Forty-three are up. But this is only for the current year. And the past one year was extraordinary for the markets. But does historical data suggest the same?

So to get a truer picture, we dig deeper into the data...

We calculated the one-month and six-month returns after 280 companies (with a market capitalisation of Rs 500 crore and above) split their shares since the year 2000.

And the results may surprise you...

The median returns one month after split were -3%...and -7% after six months.

So historically, stock splits do not bode well for short and medium-term investors.

Most interestingly, around 61% of the stocks generated negative returns after the stock split (refer to the chart below). That means the odds of generating a positive return after a stock split are only 39%.

Furthermore, around 60% of stocks (168 out of 280 stocks) generated returns between 0 and -60%. You can see how this breaks down in the chart above.

Although stocks outperformed after the split in past one year, what sixteen years of history show is that stocks usually underperform after the split. Nowadays, stock splits are more of a strategy to lure retail investors, especially during bull markets. So even if a stock looks comparatively affordable after the split, be careful to avoid the trap.