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Best World International Limited Splits 1 Share Into 2: Should Investors Be Excited?

Best World International Limited (SGX: CGN) undertook a stock split exercise recently which saw each of its outstanding shares get split into two. The company’s first day of trading after the stock split was completed was 25 May 2017.

If you’re currently an investor in the company, or interested in buying shares, should you be excited about this stock split? Afer all, if you had owned, say, 1,000 shares prior to the split, you would now be an owner of 2,000 shares.

A mistaken notion

There’s nothing to be excited about a stock split – it does not make an investor richer nor poorer. A stock 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 had 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.

The benefits of a stock split

But a stock split is not entirely superflous. It 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. This is especially true for a company with a high stock price.

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

So the next time a company announces a stock split, don’t get too excited. There are benefits, but it does not make an investor richer nor poorer.

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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.