In this blog post we’ll be explaining what is a Stock Split, Why a Company Splits its Stock, What are the Benefits to shareholders, and all such general info about the Stock Splits explained here.
Table of Contents
What is a Stock Split?
A Stock Split is a corporate action in which a Company divides its existing shares into several shares to make the stock appear more affordable to Investors.
Stock Splits are always done on the Face Value.
Example: Suppose a Stock’s Original Face Value is Rs. 10 then the company may decide to split it by half and then the new face value of the stock would be Rs. 5. So, The shareholder holding ‘n’ number of Shares before the stock Split, will get 2n number of stocks after the Stock Split.
Whenever a Company announces a Stock Split, it announces three things:
(a) Record Date (b) Ex-Date (c) Split Ratio.
The stock should be in your Demat account on the Record date to get the advantage of Stock split. In simple language, You need to Buy the stock at least 1 Day Before the announced Ex-Date to be eligible to Receive the Benefits of Stock Split.
What is a Split Ratio ?
Split Ratio is the Ratio in which the face value of Stock will be Split. Example 10:2. It means the Stock with a face value of Rs. 10 will be split into 5 stocks and after the stock split, the stock will have the face value of Rs. 2 Each.
Why does a company do a Stock Split?
The stock Priced Rs. 2000 seems expensive and Stock Priced Rs. 200 seems more affordable to small investors. As most retail investors judge the valuation of the company by looking at Market price of the share instead of valuations.
The primary aim of a stock split is to make the Stock look more affordable to retail investors. Stock Splits reduce the price per share, making the Stocks more affordable for its retail investors.
Stock Splits lead to rise in demand for the stocks of a company. Reduced prices of the Stock after Stock Split, leads to higher demand for the stock, which causes the share price to Rally.
The market capitalization of the Company is the product of Number of outstanding Shares and Market Price per share. After the stock Split, the Number of outstanding Shares of the Company increases and the price per share decreases, so the Market capitalization of the Company does not change.
Since, the split is Uniform for all the stocks of the company and across all the shareholders. Hence, The Stock Split does not dilute the shareholding pattern of the company.
What is a Reverse Stock Split?
A Reverse Stock split is a corporate action in which a Company consolidates its existing number of shares into fewer shares. Reverse Stock Split is done by companies to reduce the number of outstanding shares in the market. Stocks look more valuable (high Priced) after reverse stock Split.
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We have tried to explain What is a Stock Split, Why its Done and its effects on Stock Price. However, If you have any doubt about the Stock Split Action, Please comment your queries Below.