If MRF Splits Will You Buy?
Many retail investors are waiting for the day MRF announces a stock split. But should you jump on to buy when it does? Sure you can. But retail investors must understand that just because the stock looks affordable after the split, it doesn't mean it is a good buy.There is a huge difference between value and price.
MRF at Rs 500 after the split can be expensive, and MRF at Rs 90,000 can still be cheap. Basing your decision on price alone is a fool's play.
Companies often go for a split intending to sub-dividing the stock price to make it 'appear' cheaper. The practice is more common in bull markets. They usually do it to appease retail investors. It helps them create liquidity and marketability for their stocks.
But a stock split is a trap for retail investors, especially short-term investors.
Just have a look at the chart of Grasim Industries. The company split its share in a ratio of 10:2 on 6 October 2016. And the stock was 11% down one month after it split.
Grasim Industries Reaction to Stock Split
These are well-reputed blue-chip companies. But still the stocks sold off after the split.
Why do you think this happens?
The reason is supply. The number of outstanding shares in the market increases after the stock split. This increased supply results in a price dip.
But remember, the split might not be the only reason for price decline. A stock is affected by various factors. And investors must consider them all before investing.
In an earlier market note, we showed you how share prices fall after the bonus issue. We backed it by data showing 63% of stocks under performing post bonus issue. We have performed a similar exercise for stocks that have split since the year 2000. And the results were equally amazing. More on this next time.
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