Stock splits can be the best of both worlds for the stock exchange

From June 2023 to December end 2024, the stock market has seen the index increase by almost 200%. As recently as 23rd of June 2023, the index was barely able to maintain the levels of 40,000 points. Less than 18 months later, it seems like a figment of the imagination where the index touched 117,000 points on 17th of December 2024. With the index increasing, its constituents' stocks have also seen their values increase. The increase in value ends up becoming an impediment of sorts. Investors and other participants in the market were able to buy a bigger number of shares two years back with the same level of investment than they can now. 

As the price of the shares becomes too high, the same amount of investment is buying a lower number of shares. As the buying capacity falls, there are fewer trades taking place which dries up the liquidity and movement. This is the reason why companies like Unilever foods only sees 30 day daily average trades of less than 100 shares due to its price being in excess of Rs. 21,000 per share. In comparison to this, a share like K-electric sees 30 day daily average trade of 70 million shares as its price is less than Rs 10 per share.

As Securities and Exchange Commission of Pakistan (SECP) approves the new guidelines for stock splits, this can prove to be a solution that is able to kill two birds with one stone. It will allow companies to reduce the price of their shares and protect themselves from any additional value destruction that might take place. Here is how it is going to work.