What is a Stock Split and How Does it Work

What is a stock split? We have heard about bonus issues, right issues, dividends all of this while investing. But some of us get confused about the stock split. How this slip of shares can help us how it can help companies and the big question is why this stock split is done?

I want to clear one thing stock split does not increase or decrease the value of your investment or it does not increase or decrease the market capitalization of the company. A stock split is done because if the price of the company is felt to be too high that people are not able to buy it or it is not affordable them shareholders do recommend to split the shares. We can understand this by a simple example here, so generally, the face value of a share is Rupees 10 and you can see that the market value of shares is rupees 1000. So, if a company declares a split of shares in the ratio of 1:10 it means the number of shares is going to be increased.

What is a Stock Split and How Does it Work
Source: What is a Stock Split and How Does it Work

Say that company has 100 shares which now will turn into 1000 shares but the face value of the share will be just Rupees 1. So what about the market price. Yes, the market price of the share will also come to Rupees 100 as it gets cheaper more investors will be attracted towards it and can buy it. We can see this with IRCTC share we’re the ratio of the split was 1:5 here the face value of the share came down to Rupees 2 and market price came down to 800 and the same day the split was declared the stock was up by 10% as more and more investors were attracted to the cheaper share price.

Every large company whose value is high or due to high market price generally uses this method of a share split so that more investors can buy the stock and a cheaper value. Here the value of your investment does not change but due to the split, your number of shares in your portfolio will be changed. In the coming days, we can also expect that jublifood that is the QSR of domino’s also will be coming with this split of shares were more investors will come to invest in this company seeing the cheaper price of the company.

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