27 March is the day when Chennai based tire manufacturer company MRF share price crossed 60000. But everyone wants to know why the MRF share is so costly?
If you look back some time then you will find that the price of 1 share of MRF tire is 10,000 rupees.
At that time I talked to my friend and said to them That Do you know how much MRF one share worth? It is so costly.
MRF 1 shares cost 10000 rupees.
How can a share worth 10000 rupees?
I am definitely sure that It will not increase again. At that time I also not much familiar with investing.
And I judge share by the price that this share is costly or not.
And I am sure where 1 share of Maruti costs around 6-7k rupees, Ashok Leyland 1 share price 70-80 price, Tata motors 1 share price is around 180 rupees then 1 share of MRF worth 60-70k looks costly, It’s obvious.
Let’s know all the truth about it-
But before that Do you know how much worth Warren Buffet’s company Barkshare Hathway is
Let’ guess, 100k…. 500k…. 1M….. 5M…. no. It’s worth $3,33,860.00 wait it’s in USD. If we convert it into Indian rupee it will be around 2.3 Crore rupees.
Yes, It is more than 2 crore rupees. It means if you want to buy 1 share of Berkshire Hathway then you have to give more than 2 crore rupees. So is this share is very costly? Is this share overvalued?
So why some stocks like MRF, Page Industries or Berkshire Hathway share so much costly?
We will know all the truth of these overvalued stocks’ total truth.
Parts Vs Value
Suppose you want to buy a plot or piece of land. There is two plot is the same colony. One is 1000 square feet and the other one is 4000 feet if the first one’s worth is 1M and the other’s worth is 4M.
Then it’s reasonable that both the plots are in the same are but the area is different so that the price is also different.
But if someone doesn’t have full knowledge then one plot may seem costly and others may seem less costly.
But the truth is one plot is 1000 square foot and the other one is 4 times bigger than the first one.
If we analyze then we will find that both the plots have equal value, but one lot is bigger than another that’s why one is more costly.
In the same way, you can understand Ashok Layland as a small plot and MRF as a bigger one. It means in the starting you have to give more money but in return, you will get more part in the company.
MRF didn’t do many fractions in their company.
Let’s understand with another example. Let’s assume there is a Pizza and the price of the pizza is 300 rupees. You can also order a slice of pizza. That slice will worth 50 rupees.
So the pizza is the same but the price of pizza’s slice is varying with the size of the slice. And if you make 10 slices of that same pizza then you will get one slice for 30 rupees.
But it doesn’t mean that pizza is cheap. One slice of the pizza is cheap because no slices are more. It simply means that you share it if reduced.
Division of Shares
Let me tell you in a very simple manner. Let’s assume there are two companies. The share price of both companies is 100 rupees. After some time one company divide them into 10 shares of 10 rupees. And another company divides them into 100 shares of 1 rupee.
Now assume that after one year both the companies got 200 rupees profit. Then here’s some calculation
In company A if you have 1 share of the company then you are the owner of 10% of the company.
So if the company got 200 rupees then you will get 10 of that profit it means you will get 20 rupees.
But if you have 1 share of the company then you are the owner of only 1% of the company and you will get only 1% of the profit and you will get 2 rupees.
Is MRF A Cheap Share?
See MRF share is as much costly that not every person who is investing in the stock market can not afford even one share of the MRF.
Then how can it be cheap?
And the most important question is why the MRF share is of so much high price.
Can Any Company Change Their Share Price
Yes, any company can change its share price by splitting their share. Any day MRF can say that our 1 share is now divided into 10 shares of 5500 rupees.
And this will not have any effect on the company valuation. Their number of shares will increase. And you can buy their share at 5500 rupees.
There are so many companies that use this technique to reduce their share price. You can see the example of the Infosys.
Infosys do this so many times. If they didn’t do that then their share price will be in lacks.
But they continue doing this. And now Infosys share price is around 70.
But there are so many companies out there who don’t like this method. Like Warren Buffet’s company ‘Berkshire Hathway’ and Also MRF. They think this is not a good method to grow the company.
What is Stock Split
A stock split is one of the many corporate actions which companies may take if necessary.
In the stock split normally 1 share is divided into many stocks. The most common stock split ratios are 2-for-1 or 3-for-1.
It simply means that a stockholder which has 1 share will be 2 or 3 shares after the stock split with their respective ratios.
Benefit Of Stock Split
Now you may think that what is the benefit of the stock split. So I am giving some points which can explain to you some benefits of the stock split.
Liquidity is one of the most important benefits od stock split. A stock split increases liquidity which helps to increase the trading volume.
Stock split also makes the share price affordable for the retail investors. If a company is trading at 5000 rupees and the company announces a 10:1 ratio stock split then the stock price will be 500 rupees after the stock split.
So which price is more affordable, Obviously 500.
Overall, In terms of value, it doesn’t reduce the value or financials of the company. But it increases the participation of the retail traders and investors also.
That’s all for this post. I hope this will be helpful to you 🙂
Don’t forget to share this article with your friends and family and let me know in the comment section below how can I add more value to you guys?
Till next time guys… Good Bye 🙂
You Might Also Like These Articles: