A stock split is a corporate action in which a company increases the total number of its outstanding shares by dividing existing shares into smaller units. This process makes each individual share more affordable, without changing the overall value of a shareholder’s investment. Although the number of shares changes, the total investment value remains the same. Companies usually go for stock splits to improve market accessibility for small investors and to boost overall trading activity.
How Does a Share Split Work?
When a company announces a share split, the number of shares in circulation increases, while the value of each share decreases proportionally. However, the total value of your investment remains unchanged. This makes the stock look more affordable, especially to retail investors. For instance, if you own 1 share worth ₹1000 and the company implements a 2:1 split, you will receive 2 shares priced at ₹500 each. You still own ₹1000 worth of stock, but it’s now divided into more units. This helps improve liquidity and investor participation in the stock. Below is a simple table to better understand a share split:
| Split Ratio | Shares Held | Price per Share | Total Value |
|---|---|---|---|
| 1:2 | 10 | ₹900 | ₹9000 |
| Post-Split (1:2) | 20 | ₹450 | ₹9000 |
| 1:5 | 10 | ₹900 | ₹9000 |
| Post-Split (1:5) | 50 | ₹180 | ₹9000 |
This table clearly shows how the total value of your investment remains the same, even though the share count and price per share change.
Why Do Companies Share Splits?
Companies often use stock splits as a signal of confidence in their future performance. It also gives an impression of growth, which can positively impact investor sentiment. Many companies do share splits:
- To make the stock look more affordable for new and small investors
- To increase the number of shares available for trading in the market
- To improve overall trading activity and market liquidity
- To attract a larger and more diverse investor base, especially retail participants
Common Ratios and Types of Share Split
Share splits help make stock prices affordable and improve market liquidity. Companies either opt for a forward split, where existing shares multiply and the price per share decreases, or a reverse split, where shares combine and the price per share increases. This does not change the overall market value but adjusts the share count and price balance.
| Split Type | Ratio Example | Effect on Shares | Effect on Price |
|---|---|---|---|
| Forward Split | 2-for-1, 3-for-1, 5-for-1 | Shares increase | Price per share decreases |
| Reverse Split | 1-for-2, 1-for-5 | Shares decrease | Price per share increases |
These common ratios help break down high-value shares into more accessible units, which is particularly appealing to smaller investors.
Forward vs Reverse Share Split
A forward stock split raises the number of shares but lowers their price in proportion. A reverse stock split lowers the number of shares but raises the per-share price. Both measures leave the total value of a shareholder’s investment unchanged but influence the share number and per-share price differently.
Reverse/Forward Combo Splits
In some cases, companies may use a combination of forward and reverse splits to meet specific financial or regulatory goals. They might use this approach to maintain a certain stock price range required by stock exchanges.
Effects on Investors and Market
Stock splits affect the investors and the general market in several ways, such as affecting share value perception, trading behaviour, and investor engagement:
- Shareholders get additional shares, but the value of the investment is not increased
- A lower share price can attract new investors who were previously priced out
- Increased interest can lead to higher trading volumes and better liquidity
- Creates a positive perception of the company’s growth and activity
Stock splits can also generate media buzz, encouraging more public attention and possibly increasing demand.
Liquidity and Affordability
After a split, more shares are available at a lower price, which boosts the liquidity of the stock. For instance, if a stock splits 1:5, the share price goes down, making it more accessible to new buyers. This wider accessibility encourages trading and can help stabilise stock movements.
To participate in such opportunities, investors first need to open a demat account, as it is mandatory for buying and holding shares in electronic form.
Findoc’s stock split is 1:2, meaning that each share is divided into two shares, reducing the price per share by half and doubling the number of shares. This makes it more affordable and liquid for trading among investors.
Impact on Market Cap, EPS, Historical Charts
The market capitalisation of the company does not change after splitting. But Earnings Per Share (EPS) goes down because profits are split into more shares now. Historical stock charts are also adjusted to reflect the new prices, maintaining a consistent view of the stock’s performance over time.
By facilitating investments in expanding businesses that frequently conduct stock splits to enhance market involvement, Findoc enables investors to diversify wisely and capitalise on emerging market opportunities.
Additional Read: Types of Trading in the Stock Market
Regulatory, Tax & Trading Adjustments
Certain rules and adjustments are applied during a stock split to ensure smooth trading and compliance without impacting investor taxation, for instance:
- No taxes are applicable during a stock split, as no actual gains are realised
- The stock begins trading at the new adjusted price on the ex-split date
- Exchanges also adjust futures and options contracts and mutual fund NAVs accordingly.
These adjustments ensure a smooth transition for all investors and preserve the financial integrity of market instruments.
Key Dates: Record, Ex-Split
- Record Date: The company uses this date to identify which shareholders are eligible to receive the new split shares
- Ex-Split Date: This is the first date the stock trades at the adjusted price after the split
Knowing these dates is important for investors who wish to benefit from an upcoming stock split.
Adjustments in F&O and Mutual Fund Splits
F&O contracts are adjusted proportionally when a stock split happens to align with the new share price and lot size so the contract value remains unchanged. Mutual funds also update their Net Asset Value (NAV) and unit holdings so that total investors’ holdings and value remain unchanged.
Share Splits vs Bonus Shares and Spin-Offs
Stock splits divide shares into smaller lots, which reduces their cost. Bonus shares are distributed from a company’s profits or reserves. Additionally, spin-offs involve establishing a new company that is independent and distributing its shares to the shareholders. These three actions may seem similar, but differ in purpose, impact, and how they affect shareholders, as shown below:
| Aspect | Share Split | Bonus Shares | Spin-Off |
|---|---|---|---|
| Purpose | Improve liquidity, make shares affordable | Reward shareholders from reserves | Create a new, independent company |
| Shareholder Impact | Same ownership, more shares at a lower price | More shares, same overall investment | Shares of a new company are issued |
| Company Value | Unchanged | Unchanged | Divides the value between two companies |
Pros and Cons of Share Splits
Though share splits have numerous advantages for companies and investors, they also have certain limitations that should be taken into account:
Pros:
- Improves trading activity
- Attracts more investors
- Enhances share affordability
- Creates a perception of growth
Cons:
- Doesn’t change company fundamentals
- May lead to short-term volatility
- Requires system-wide adjustments
Findoc empowers investors by providing them with access to stocks via simplified investing schemes, such as chances to profit from events like stock splits.
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Frequently Asked Questions
A forward stock split increases the number of shares and lowers the price of each share. A reverse stock split reduces the number of shares but increases the price per share. In each instance, the overall value of your investment remains the same.
In a 2-for-1 stock split, every 1 share you own becomes 2 shares. The price per share is cut in half, but your total investment value stays unchanged. For example, if you had 1 share worth ₹1000, you now have 2 shares worth ₹500 each.
No, a stock split does not change the market capitalisation. It only changes the number of shares and their individual price. The total value of the company in the stock market stays the same.
A 1.5 share split means that for every 1 share you own, you will get 1.5 shares. So, if you have 2 shares, you’ll get 3 shares after the split. It’s a way for companies to increase shares without using round numbers.
