What Is The Deal With Raffles Medical Group Ltd’s Upcoming 3-For-1 Share Split?

Healthcare services provider Raffles Medical Group Ltd (SGX: R01) said recently that its shareholders have approved its proposal for a three-for-one share split.

What is this share split all about? Let’s explore.

The mechanics of the split

The first day of trading of Raffles Medical’s shares on a sub-divided basis is 9 May 2016. As for the books closure date, that will be 11 May 2016, 5pm.

A shareholder that has Raffles Medical’s shares registered under his name on the books closure date will see every share he holds be split into three shares.

A mistaken notion

I remember that when I was younger, my aunties and uncles would cheer whenever they hear that the companies they hold shares of would undergo a share split. Their rational is that since they will hold more shares after the split, this translates to more money!

But, the reality is no where close to their perception. In fact, a share split does not make them richer nor poorer. A share split merely increases the number of shares by splitting the existing shares of a company into more shares. Though the share count has climbed, the value to investors remain the same.

How is that so? Let’s use a simple example to illustrate – Pizza.

Imagine a group of four people going for a pizza dinner. Naturally, they will order a pizza, slice it into pieces and share the pizza amongst them. Assuming that all four will share the pizza in the same porportion, each of them will have one-quarter of the whole pizza.

Now, lets assume that they can choose to slice the pizza into four slices or eight slices, in which they choose the latter. Does it mean that each person now has more pizza than if they have chosen the former?

Of course, the answer is no.

Regardless of how they slice the pizza, each person will still get the same amount of pizza. Splitting the shares of a company is similar to slicing the pizza.

What a share split does

But a share split is not entirely superflous. A share split can help increase the liquidty of a stock. This can allow a company’s shareholders to trade its stock with greater ease. It helps make portfolio allocation decisions easier for investors as well.

As a hypothetical example, let’s assume an investor holds one share of a company with a price tag of S$3,000. He can only make a one-time transaction worth S$3,000. But if the company undergoes a three-for-one share split, the price of each share would now be S$1,000 and the investor would hold three shares. In this way, the investor can choose to hold, say, just S$2,000 or S$1,000 of the stock and liquidate the rest of his holdings.

A high share price might also make it hard for retail investors to invest in a company. With a share split, each “new” share will have a lower price, thus boosting affordability.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.