Fin548 - Investment Analysis - Stock Split Effect

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FIN548

INVESTMENT ANALYSIS

‘STOCK SPLIT EFFECT’

PREPARED BY:

WAN NUR ATIQAH BINTI CHE MOHD LUDIN

(2015125989)

NURUL FARHANA BINTI ADNAN

(2015137039)

GROUP: BM242 4D

PREPARED TO:

MISS NURHASLINDA BINTI HASHIM

ACKNOWLEDGEMENT

        We, Nurul Farhana Binti Adnan and Wan Nur Atiqah Bt Che Mohd Ludin take this opportunity to express our profound gratitude and deep regards to our lecturer FIN548, Miss NurHaslinda Binti Hashim for her exemplary guidance, monitoring and constant encouragement throughout the course of this assignment. The blessing, help and guidance given by her time to time shall carry us a long way in the journey of life on which we are about to embark.

        We also take this opportunity to express a deep sense of gratitude to our friends who give full support, sharing valuable information and guidance, which helped us in completing this task through various stages. Without help from them , we may unable to complete this assignment as assigned.

        Lastly, we thank almighty, our parents, and families for their constant encouragement without which this assignment would not be possible.

MARKET ANOMALY

        Anomaly is a strange or unusual occurrence. Market anomalies are market patterns that show to abnormal returns more often than not, and since some of these patterns are based on information in financial reports, market anomalies present a challenge to the semi-strong form of the EMH, indicating that fundamental analysis does have some value for the individual investor.

STOCK SPLIT EFFECT IN MARKET ANOMALY

        A stock price or return is affected by a stock split. A stock split is usually done by companies that seen their share price increase to levels that are either too high or are beyond the price levels of similar companies in their sector. The primary motive is to make shares seem more affordable to small investors even though the underlying value of the company has not change.

        A stock split has the effect of stock by reducing the market share price of the stock. It will increase the number of shares outstanding and at the same time, the total value of the shares remains the same as before the split occur. A stock split has no effect on equity, or ownership control and therefore requires no journal entry. For example, in a 2-for-1 stock split, every shareholder with one stock is given an additional share. So, if a company had 1 million shares outstanding before the split it will have 2 million shares outstanding after a 2-for-1 split.

        The price of stock is also affected by a stock split. After a split, the stock split price will be reduced as the number of shares outstanding has increased. In the above example of a 2-for-l split, the share price will be halved. So, although the member of outstanding shares and the stock price change, the market capitalisation remains constant. The price of stock will decrease immediately after the stock split occur. The small investors will have their own opinion that the stock is more affordable. So they will increasing in their demand and drive up prices.

        The reason for the increase in price is that a stock split supplies a signal to the market where the share price of the company has been increasing and people think that this rate of growth will continue in the future. The stock split is basically used by those companies whose price of shares increases substantially. As such, stock split becomes helpful to small investors that brings greater marketability and maintains market liquidity.

        A company may declare a stock split to control the trading range of the stock on the open market. If the board of director find out the trading range for the stock is RM25 per share, but the stock is trading RM50 per share. So the board of director will declare a 2 for 1 split. Each shareholders will receive two share of the stock for each share they owned previously, but each share would be 50 percent of the previous price, so the value of shareholders' would remain the same. The split will increase the demand for the stock among small investors, which will improve the stock’s liquidity and raise its price. So the number of shareholders in the firms may tend to increase after a split. When the splits are announced, the abnormal return may occur.