The Hindu Business Line : Stock-splits... <br>Key drivers

Affordability: Investors with only a small amount of money to spare for equity investment may have to part with their entire disposable income to buy a stock such as Lakshmi Machine Works (LMW) that trades at Rs 20,000. Even though valuation levels may appear attractive, the absolute stock price can be a deterrent. An investor may prefer to put his money in, say, Indian Card Clothing, which trades at Rs 220. He would be in a better position to enhance his exposures in such stocks, or reduce them, as and when he chooses. As investors stay away from the likes of LMW, such high-value stocks tend to become illiquid.

Liquidity: Going by the LMW example, such stocks tend to have a wider bid-ask spread, which slows trade execution. As a result, the number of trades and the trading volumes are lower.

Despite the fancy for textile stocks in 2005, LMW — a textile equipment manufacturer — attracted little activity. The volumes were, at best, in five digits on the BSE.

Investor psychology: Investor psychology also plays a big part in such actions. Generally, less-savvy investors are happier after a split or a bonus issue as they have more shares in their portfolio without putting in additional funds.

For instance, some investors think that, with a given sum of money, they are better off buying a higher number of TCS shares compared to Infosys.

Bonus vs stock-splits

While both actions create additional outstanding shares, bonuses tend to score over stock-splits. When a stock goes ex-split or ex-bonus, the number of outstanding shares of the company increases.

While a stock-split reduces the face-value of the share, a bonus capitalises the reserves. While a company without any reserves can split its shares, this is not possible in a bonus issue.

A company can issue bonus shares only out of the earned reserves that are available for dividend distribution

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