Lasco Manufacturing Limited, Lasco Financial Limited and Lasco Distributors Limited recently announced plans to hold an Extraordinary General Meeting to consider the recommendation to split the shares of the company by subdividing each unit into ten new shares. This corporate action is known as a stock split.

But what is a stock split? This article will demystify the topic, while illustrating the benefits of this type of action.

Firstly, a stock split refers to the increase of a company’s outstanding shares, which in turn diminishes its price. This raises the number of shares outstanding by issuing more shares to current shareholders, but does not affect market capitalisation. In the case of the aforementioned companies, they are planning to split each share into ten units, and in turn divide the price of the shares by ten.

So, why would a company consider splitting its stock? A very straightforward reason is to increase the stock’s liquidity and for the company management to signal to the market that the stock has growth potential. The division of the units increases the shares outstanding while leaving the market capitalisation untouched. With increased liquidity, more investors will be buying and selling the stock, which will translate into greater volatility in price and presents investors with the opportunity to make capital gains.

Another reason stems from the psychology of investors. As the price of a stock gets higher and higher, some investors may feel that the price is too high or that the stock is becoming unaffordable. The action of dividing the shares will bring the stock price down to an attractive level for investors. Essentially the value of the stock does not change, but the new price is more likely to entice investors as it is seen as a bargain. This allure usually leads to increased trading and with the increased liquidity, more investors can get their hands on units of the company.

Additionally, splitting the stock gives existing shareholders the feeling that they suddenly have more shares than they did before, and of course gives them more units to trade.

Companies such as Access Financial Limited and Salada Foods Jamaica Limited are examples of locally listed entities that have carried out stock splits in the past. Salada’s board considered the stock split due to the fact that its market price was rising too quickly and would take the stock out of the reach of ordinary investors.

In the case of Access Financial Limited, the company wanted to split its stock to stimulate market demand. It must be noted that even though a stock split increases the liquidity of a stock, it all depends on whether current shareholders will be willing to part with any of their investment. If not, then the stock split will not be very effective in achieving the desired results.

Stock splits are also an indication that a stock is doing well. Lasco Financial, Manufacturing and Distributors Limited have all displayed a virtuoso performance as they have appreciated significantly from their IPO price of $2.50 to over the $10 mark.

Lasco Manufacturing Limited, Lasco Financial Limited and Lasco Distributors, which will hold their Extraordinary General Meeting today, are the most expensive stocks in their respective industry on the Junior Market. If shareholders approve the stock split, the price of the these companies’ stock will fall into the sub-two dollar range, making it more affordable for mainstream investors to purchase.

Emile Wallace-Waddell is a Research Administrator at Stocks and Securities Ltd and can be contacted via ewallace-waddell@sslinvest.com.