A stock split is a corporate action where a company increases the number of its shares by dividing each existing share into multiple new shares.
While this increases the number of shares available in the market, the overall value of the company (market capitalization) stays the same.
As a result, the price per share reduces, but the total value of an investor's holdings doesn't change.
Stock splits make shares more affordable and easier to buy, especially for retail (individual) investors.
How Does a Stock Split Work?
In a stock split, the company’s board of directors decides to split each share in a fixed ratio — like 2-for-1 or 3-for-1.
For example:
A 2-for-1 split means one existing share is split into two new shares.
A 3-for-1 split means one share becomes three.
Process of a Stock Split:
- The company’s board announces and approves the stock split.
- Shareholders receive additional shares based on the split ratio.
- The share price is adjusted proportionally so that the total investment value remains the same.
- The total number of shares increases, but the overall value of the company does not change.
Why Do Companies Split Their Stock?
- To make the stock price more affordable for small or retail investors.
- A lower share price may attract more investors, especially those who find high prices intimidating.
- It may increase liquidity (ease of buying/selling shares) and improve trading activity.
- While a stock split doesn’t increase the company’s value, it can create positive sentiment in the market.
Example of a Stock Split
- Let’s say a company announces a 2-for-1 stock split.
- You currently own 100 shares, and the share price is ₹100.
- Your total investment value is ₹10,000 (100 × ₹100).
After the split:
- You will now own 200 shares.
- The share price will be adjusted to ₹50.
- Your total investment value remains the same at ₹10,000 (200 × ₹50).
So, while the number of shares you hold has doubled, the value of your investment is unchanged.
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