Hello folks, You people might recently have heard about stocks splits, with an announcement of stock splits by one of the reputed companies on PSX- LUCK. So, let’s try to understand the story around Stock Splits. 

Stock splits play a crucial role in enhancing market dynamics by making shares more accessible, boosting liquidity, and reinforcing investor confidence. By increasing the number of shares while reducing the per-share price, companies ensure wider market participation and improved trading efficiency. A well-executed stock split can expand accessibility, enhance liquidity, reinforce investor trust, and act as a tax-efficient method to unlock value—and all of these, as you know, are the key drivers of an efficient market.

Lucky Cement’s 5-for-1 stock split, announced on February 21, 2025. Subject to shareholder approval at an Extraordinary General Meeting (EoGM) on March 18, 2025, the company will increase its ordinary shares from 293 million to 1465 million, while the stock price will be divided by five. Source (PSX Announcements). Though the intention behind the stock split is unknown to us. Thus, a subjective analysis of mine makes me to reach following assertions. One may disagree with them. This move is expected to enhance market participation, making Lucky Cement shares more affordable and attractive to a broader investor base, especially retail investors.

A key benefit of stock splits is the increase in market liquidity, allowing for smoother and more efficient trading. With a higher number of shares available at a lower price, investor demand often rises, reducing bid-ask spreads (Familiar with the term? If not then visit our YouTube Channel-YMS Classroom) and making it easier for buyers and sellers to execute trades without significant price fluctuations. This improved liquidity contributes to a more vibrant and active market.

Additionally, stock splits serve as a non-taxable method of adjusting share prices. Unlike bonus shares, which are subject to taxation in Pakistan, stock splits do not create a tax liability for investors. This makes them a more efficient way for companies to restructure their shareholding without immediate tax implications for shareholders.

Now, one should ask, why any company (if we assume my subjective analysis as a reason behind the stock split) engages itself in improving the dynamics of stock exchange in any manner, when its primary focus is to maximize the profits of the shareholders? Also the stock splits do not bring any financial advantage to the shareholders. Let’s discuss this now. Following assertions are not related to LUCK.

The answer lies in the broader financial and strategic benefits that a stock split can bring to a company. One key advantage is easier capital raising. A liquid, actively traded stock allows a company to secure financing more efficiently through Follow-on Public Offerings (FPOs) or Rights Issues. When shares are widely held and frequently traded, issuing new shares has less impact on price volatility, making equity financing a more viable and cost-effective option.

Additionally, stock splits help reduce the risk of stock price manipulation. Illiquid stocks, especially those with high ownership concentration, are more vulnerable to artificial price movements caused by large investors or speculators. When only a few shareholders control most of the shares, small trades can lead to significant price swings. By increasing the number of shares available and expanding the shareholder base, stock splits help stabilize pricing and ensure that the stock value is determined by broader market forces rather than a few large players.

 

Moreover, a stock split can enhance a company’s corporate image and financial flexibility. Institutional investors, index funds, and ETFs prefer stocks with high liquidity, as they provide greater opportunities for entry and exit. By making shares more accessible, a company increases its chances of being included in major stock indices, which in turn attracts passive investment flows and long-term investor interest. This can boost demand for the stock, improving its market positioning and valuation stability. Furthermore, a well-traded stock enhances the company’s credibility in financial markets, making it more attractive for strategic partnerships, mergers, and acquisitions, where stock-based transactions play a key role.

Got it? I hope this blog helped you in understanding few things about stock splits.

 

Disclaimer: This content is for educational and informational purposes only. It should not be considered financial or investment advice. Always do your own research or consult with a licensed financial professional before making any investment decisions.