[Beginner's Guide] Will Shinsegae Inter Become a National Stock?... The Magic of 'Stock Split'

[Asia Economy Reporter Kwon Jaehee] There was a notable announcement among the disclosures released last week. It was the announcement that Shinsegae International will conduct a stock split, dividing one common share into five shares. Shinsegae International, which achieved record-breaking performance last year, revealed the stock split plan as part of its shareholder-friendly policy. The day after the stock split announcement, Shinsegae International’s stock price rose by over 4% in early trading, showing strong momentum.

'What is a stock split?'

A stock split literally means dividing the face value of a stock by a certain ratio, lowering the price per share while increasing the number of shares. For example, if a company with a face value of 5,000 won decides on a 50-for-1 stock split, the face value per share becomes 100 won, which is 1/50th of 5,000 won. Since the market capitalization remains unchanged, a decrease in face value results in an increase in the number of shares outstanding. A company’s market capitalization is calculated by multiplying the number of shares by the stock price, so a stock split does not affect the company’s market capitalization.

They say no impact on market cap... so why is it good news for stock prices?

The magic of a stock split lies in the 'optical illusion' it creates. For instance, if Company A’s stock price was 2.5 million won per share and it undergoes a 50-for-1 stock split, the price per share becomes 50,000 won, making the stock appear more affordable. Because of this, stock splits increase accessibility for individual investors and can transform a stock into a 'national stock.' By lowering the stock price of companies that were previously too expensive to trade, the entry barrier is reduced, and for companies with low trading volumes, the increase in the number of shares helps activate trading.

In fact, Kakao’s stock price surged 55% within about two months after its stock split in April last year. Samsung Electronics also saw an intraday surge of over 8% in January 2018 following its stock split announcement during trading hours.

Additionally, when the number of shares outstanding is low, the stock price tends to fluctuate frequently due to large buy and sell orders from institutional investors. Therefore, increasing the number of shares outstanding through a stock split and expanding the number of small shareholders can significantly offset the risk of stock price volatility.

Is the magic of stock splits universal?

Stock splits are actively conducted overseas as well. Apple has executed five stock splits since its listing. After its stock splits, Apple’s stock price steadily rose, and in January this year, it became the first company in the world to surpass a market capitalization of $3 trillion (approximately 3,600 trillion won) during trading hours. Besides Apple, Nvidia announced in May last year a 4-for-1 stock split, dividing one share priced near $650 into four shares. Tesla also conducted a 5-for-1 stock split earlier.

Japan’s Toyota also conducted a stock split last September for the first time in 30 years, reaching its highest stock price since its listing in 1949. Toyota split its 10,000 yen face value shares into 2,000 yen shares, and its stock price closed at 10,385 yen per share, marking a record high since listing.

When high-growth companies lower their per-share price, individual investors have no reason not to buy these stocks. Stock splits that increase accessibility for individual investors act as positive factors for the stock prices of high-quality stocks with high per-share prices.

[Image source=AP Yonhap News]

Does the magic of stock splits always work?

However, the magic of stock splits does not always work. When trading becomes easier due to a stock split, prices can also fall. Cuckoo Holdings, which conducted the same 5-for-1 split as Shinsegae International last August, saw its stock price drop about 8.5% compared to the reference price of 26,400 won on the first day of re-listing after the split. Earlier, Samsung Electronics, after changing from 2.5 million won per share to 50,000 won in January 2018 and becoming a 'national stock,' experienced a surge in trading volume but its stock price also fell to the 40,000 won range. Lotte Chilsung’s stock price also dropped from 165,000 won to 150,000 won after a 10-for-1 stock split in 2019.

Moreover, there are criticisms that the benefits of stock splits are limited in the long term. This is because more brokerage firms are eliminating trading fees, and some have introduced products that split shares internally. For example, the online brokerage platform Robinhood offers a service that allows investors to buy fractional shares regardless of how expensive the stock price is.

Editor's Note[Beginner’s Guide to Stocks] is a smart investment guide for 'Joorini' (a combination of 'stock' and 'child' in Korean). We explain unfamiliar stock stories to beginners in a kind and easy-to-understand way.