We often heard about public company who want to do stock split or divide the amount of its share, what is the meaning and purpose of stock split? And what is the meaning of reverse stock split?

We will explain the meaning of stock split and reverse stock split in two different article.

Stock split

Stock split is one form of corporate action done by issuers, by splitting the number of its share. This will automatically split the price of share, the nominal and market price. The general ratios of stock split are 1:2, 1:5, 1:3 etc.

Illustration from stock split is like this, for example; before split: The A company has 5 million shares with the nominal price of Rp 1,000. When the company announce that it would do a 1:2 stock split, the price in the market is Rp 2,000.After split, the company will own 10 million shares (5 millions x 2) with the nominal price of Rp 500 (Rp 1,000/2) while the market price is Rp 1,000 (Rp 2,000/2).

Impact to investor:

If you, as an investor in A company, own 5,000 shares before split, then your investment value in A company is Rp 10M (5,000x Rp 2,000). After the split, you will own 10,000 shares at the price of Rp 1,000, so your total investment value is Rp 10M (10,000 x Rp 1,000), or in other word stock split didn't make a difference in your investment value.

The reason why company do a stock split:

• So its share will be more attractive to the investor. Because psychologically, investor is more attracted to buy cheaper stock. With more investor attracted to the stock, the possibility of price increase is bigger, eventhough there is no guarantee for that.

• The number of outstanding stock will be increase, so it will be more marketable and liquid.

Important date that should be noticed:

• The date when management announced to do stock split

• The date when the extraordinary shareholder meeting approved the stock split

• Listing date

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