What Is a Stock Split? Understanding Share Splits on Bursa Malaysia
A stock split or share split is often seen as "good news" by retail investors on Bursa Malaysia. But does it truly add value to your investment, or is it merely a cosmetic change to make the share price look more attractive?
In this article, we will explain in a simple and straightforward way what a stock split is, why companies do it, and what it means for your pocket as an investor.
What Is a Stock Split? (Simple Analogy)
Imagine you have a large pizza cut into 4 slices. You feel the pizza is too big to eat at once or too difficult to share with friends. So you cut each slice in half. Now you have 8 slices of pizza.
The question: Did the total size of your pizza increase?
The answer: No. The total pizza remains the same size — only the number of slices has increased.
In the stock market, the "pizza" is your ownership value in the company. When a company performs a stock split, they are not adding value to the company. They are simply dividing the existing shares into a larger number of units at a lower price per share.
Why Do Companies on Bursa Malaysia Perform Stock Splits?
You might wonder — if the company's value does not change, why bother doing a stock split? There are three main reasons:
1. Increasing Liquidity
When a company's share price is too high — say RM50 per share — not many retail investors can afford to buy it. By performing a stock split (e.g. 1:10), the share price becomes RM5. This makes it easier for more people to buy and sell, thereby increasing trading volume in the market.
2. The "Cheap Price" Psychology
Psychologically, investors are more inclined to buy 1,000 units of shares priced at RM1 rather than 10 units priced at RM100, even though the total value remains RM1,000. A lower price appears more "affordable" and attracts new investors.
3. Meeting Index Inclusion Criteria
Certain indices or institutional funds have specific criteria regarding liquidity and free float. A stock split helps companies meet these criteria to remain relevant on the radar of large institutional investors.
Mechanics & Calculation: How Does It Work?
Let us look at the technical aspect. In every stock split announcement, the company will state the Split Ratio. The most common examples are 1-for-2 (1:2) or 1-for-5 (1:5).
Calculation Example (1:5 Ratio)
Suppose you own 1,000 units of Company ABC shares at RM10.00 before the split.
- Original Capital: 1,000 units x RM10.00 = RM10,000
- After Split (1:5):
- New number of units: 1,000 x 5 = 5,000 units
- New price per share: RM10.00 / 5 = RM2.00
- New Total Capital: 5,000 units x RM2.00 = RM10,000
As you can see, the Market Capitalisation and your portfolio value remain the same. The only thing that changes is the number of units you hold.
Impact on Investors: Profit or Loss?
Many new investors mistakenly believe they will receive "free shares." This is a myth. However, there are indirect effects you should know about:
Advantages
- More Affordable: You can buy shares with a smaller capital outlay. On Bursa Malaysia, 1 lot equals 100 units. If a share costs RM80, you need RM8,000 for 1 lot. After a 1:10 split, the price becomes RM8, and you only need RM800 for 1 lot.
- Potential Price Increase: Typically, after a split, higher liquidity can attract stronger buying interest, which sometimes drives the price back up over the long term.
Risks
- Higher Volatility: Because many retail investors (speculators) can enter easily, the share price may become more "wild" or unstable.
- No Change in Fundamentals: A stock split does not mean the company is more profitable. If the company's business deteriorates, the share price will still fall even after a split.
If you want to learn more about other corporate exercises such as bonus issues, share splits, share consolidations and more, read:
Complete Guide to Corporate Exercises on Bursa Malaysia
Important Bursa Malaysia Procedures You Must Know
If you hold shares in a company that is about to perform a stock split, you will see these terms in the Bursa announcement:
- Announcement Date: The date the company proposes the share split to Bursa and shareholders.
- Ex-Date (Ex-Entitlement Date): This is the most critical date. If you buy shares on or after this date, you will not receive the additional units from the split. The share price will be automatically adjusted on the morning of this date.
- Entitlement Date (Record Date): The date on which your name must appear in the company's shareholder records to be eligible to receive the split units.
- Listing Date: The date when the new share units enter your CDS account and can be traded.
To help you visualise this more clearly, here is a simulation table comparing two common stock split ratios on Bursa Malaysia.
This scenario assumes you own 1,000 units of Company XYZ shares at RM6.00 per share before the split.
Stock Split Simulation Table
| Item | Before Split | After Split (1:2) | After Split (1:3) |
|---|---|---|---|
| Total Units Owned | 1,000 units | 2,000 units | 3,000 units |
| Price Per Share | RM6.00 | RM3.00 | RM2.00 |
| Portfolio Value | RM6,000 | RM6,000 | RM6,000 |
| Minimum Cost for 1 Lot (100 units) | RM600 | RM300 | RM200 |
Mathematical Formula
To calculate the adjusted price manually, you can use this formula:
New Price = Old Price / Split Factor
Example for 1:3 Ratio: New Price = RM6.00 / 3 = RM2.00
For the number of units:
New Units = Old Units x Split Factor
Important Notes for Investors:
- Portfolio Value Remains the Same: Notice the Portfolio Value row. Although your units multiply, the total value of your investment does not change at the moment of adjustment.
- The "Affordable" Effect: Look at the Minimum Cost for 1 Lot row. Previously, an investor needed RM600 to buy 1 lot. After a 1:3 split, a new investor only needs RM200. This is what increases liquidity in the market.
- Adjustment Timing: The price in your trading platform will change automatically on the morning of the Ex-Date. If you see the price drop sharply that morning, do not panic — check your unit count, it should have increased accordingly.
Stock Split vs. Bonus Issue — What Is the Difference?
Both Stock Split and Bonus Issue appear similar because both cause your number of share units to increase and the price per share to decrease. However, from an accounting and market signalling perspective, they have significant differences.
Here is a comparison table to help you understand:
| Feature | Stock Split | Bonus Issue |
|---|---|---|
| Meaning | Dividing existing shares into smaller units. | Giving additional shares for free to existing shareholders. |
| Impact on Capital | No change to the company's share capital. | Increases the company's total share capital. |
| Source of Shares | No funding required — purely a technical split. | Taken from the company's reserves (retained earnings). |
| Main Purpose | Increase liquidity and lower the price to make shares more affordable. | Reward investors and signal that the company has strong reserves. |
| Market Signal | Neutral. Purely to facilitate trading. | Positive. Shows the company is profitable and confident about future growth. |
| Portfolio Value | Remains the same at the time of adjustment. | Remains the same at the time of adjustment. |
The Accounting Difference (Very Important!)
- Stock Split: Think of it as exchanging a single RM10 note for ten RM1 coins. The value is still RM10 — only the form has changed. The company does not need to "pay" anything to do this.
- Bonus Issue: Think of it as the company taking money from their savings account (Reserves) and converting it into new shares to give to you. This shows the company is "healthy" because it has substantial savings to convert into capital.
Which One Is Better?
Generally, investors on Bursa Malaysia prefer Bonus Issues. Why? Because a company can only issue bonus shares if it has sufficient profits in its reserve account. It is a sign of maturity and financial strength.
Stock splits are typically done by companies whose share prices have become too high (e.g. reaching RM20 and above) to ensure retail investors can still buy the shares in multiples of 1 lot.
Conclusion: Should You Buy a Stock That Is About to Split?
Do not buy a stock solely because it is about to undergo a stock split. Remember, it is merely a technical change to the share structure, not a change in business quality.
Always check:
- Is the company still profitable?
- Is their business sector still relevant?
- Is the current valuation already too expensive or still reasonable?
A stock split is a bonus in terms of liquidity, but fundamentals remain king.
FAQ — Stock Split on Bursa Malaysia
What happens to my shares during a stock split?
Your total number of shares increases according to the split ratio, but the price per share decreases proportionally. Your total portfolio value remains the same.
Do I need to do anything when a stock split is announced?
No action is needed. The adjustment happens automatically. Your broker and Bursa Depository will update your CDS account on the listing date.
Is a stock split the same as getting free shares?
No. A stock split does not add any value to your investment. It simply divides your existing ownership into more units at a lower price. For actual "free shares," look at bonus issues instead.
How does a stock split differ from a bonus issue?
A stock split is a technical division of existing shares with no accounting impact. A bonus issue creates new shares funded from the company's retained earnings (reserves), signalling financial strength.
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