1. A stock split is a corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares.
2. The primary motive is to make shares more affordable for retail investors even though the underlying value of the company has not changed.
3. Since many retail investors think that the stock is now more affordable, they buy the stock and end up boosting demand which drives up prices. So, it results in an increase in share price following a decrease immediately after the split.
We can see this market reaction reflecting in the example of the Apple Stock split in June 2014. Apple Inc. split its shares 7-for-1 to make them more accessible to a larger number of investors. Right before the split, each share's opening price was approximately $649.88. After the split, the price per share at market open was $92.70, which is 648.90 ÷ 7.
The day after the stock split, the price had increased to a high of $95.05 to reflect the increased demand from the lower stock price.
The scenario of Stock Split in Indian Markets
On 22/05/2019, HDFC Bank announced a stock split of 1:1 (Old Face Value- 2, New Face Value- 1)Following were the key dates:
1.Record Date: 20/09/2019- determines which shareholders are entitled to receive additional shares due to the split.
2.Ex-Split Date: 19/09/2019- ex-date is usually set one business day prior to the record date since India follows a T+2 rolling settlement for delivery of shares.To be eligible for a stock split, investors need to buy the stock at least on or before 18/09/2019 because the stock price will be split-adjusted on 19/09/2019. So, the record date is very important for shareholders to be eligible for a stock split because of the T+2 settlement.
The scenario of Stock Split in USA Market
Apple Stock Split Timeline 2020:There are several key dates.1.The Record Date – August 24, 2020 - determines which shareholders are entitled to receive additional shares due to the split.
2.The Split Date – August 28, 2020 - shareholders are due to split shares after the close of business on this date.
3.Ex-Date – August 31, 2020 - the date determined by Nasdaq when Apple common shares will trade at the new split-adjusted price.
If you notice, Ex-Date in the USA stock market is after the record date! In USA markets Ex-Date is the most important date. This means that even if you buy the stock on 28th August 2020, you will be eligible for a stock split because the stock price will be split-adjusted after market hours on 28th August 2020. There is no significance of record date left in the USA stock market. Please note that 29th August and 30th August are holidays for the stock market.
This is clarified by FAQ on Apple’s website:
What happens if I buy or sell shares on or after the Record Date and before the Ex-Date? If you sell shares on or after the Record Date (August 24, 2020) but before the Ex-Date (August 31, 2020) you will be selling them at the pre-split price. At the time of the sale, you will surrender your pre-split shares and will no longer be entitled to the split shares. Following the split, the new owner of the shares will be entitled to the additional shares resulting from the stock split. If you buy shares on or after the Record Date but before the Ex-Date, you will purchase the shares at the pre-split price and will receive (or your brokerage account will be credited with) the shares purchased. Following the split, you will receive (or your brokerage account will be credited with) the additional shares resulting from the stock split.
Source: https://investor.apple.com/faq/default.aspxIf you are still not clear about the difference between a stock split concept in India and the USA, you can watch a detailed video on our Youtube Channel.