The main benefit of a stock split is to make shares more affordable for average investors. Although it increases shares without adding real value, the market adjusts share prices accordingly on stock exchanges like BSE & NSE.
Stock Split Meaning
A stock split is when a company divides its existing shares into more shares, making each share cheaper. This boosts trading as shares are more affordable, but the overall value of your investment doesn’t change.
Further Explanation with an Example:
For instance, if a company’s stock is trading at ₹1,000 per share and they announce a 2-for-1 stock split, the number of shares will double, but the price of each share will be halved, making it ₹500 per share. This means if you had 1 share before the split, you will have 2 shares after the split, each valued at ₹500. However, the total value of your investment remains the same, i.e., ₹1,000.
What Are The Benefits Of Stock Split?
The main benefits of a stock split include making shares more affordable and increasing their number, thereby enhancing trade volume and liquidity. This accessibility attracts new investors, potentially driving up the stock price, may also appeal to larger investors due to the higher market value post-split.
The benefits of a stock split include:
- Improved Liquidity: More shares on the market can enhance liquidity, making it easier to buy and sell the stock without causing large price fluctuations.
- Lower Share Price: The split lowers the price per share, making it more accessible to a broader range of investors. Lower-priced shares can be more attractive to small investors who might find it too expensive to buy high-priced shares.
- Perceived Affordability: Even though the intrinsic value of the company doesn’t change, the lower share price may be perceived as more affordable or as a bargain, potentially attracting more investors.
- Psychological Impact: Investors may interpret a stock split as a signal that the company’s management is confident about the future. It’s often seen as a positive sign that the company is doing well.
- Increased Demand and Potential Price Increase: As more investors can afford to buy the shares, the increased demand can potentially drive up the stock price.
- Dividend Flexibility: Post-split, companies might find it easier to increase their dividend per share, as each share now represents a smaller ownership stake in the company.
- Index Inclusion: Some indices have price criteria for inclusion. A lower per-share price post-split may help a company meet these criteria.
How Does A Stock Split Work?
A stock split works by a company dividing its existing shares, thereby increasing their total number in the market. This process lowers the individual stock price without reducing its value to existing shareholders, potentially attracting new buyers with the more accessible price.
For example, let’s say a company listed on the Bombay Stock Exchange (BSE) has a stock trading at ₹1,000 per share and decides to perform a 2-for-1 stock split. This means each existing share is split into two shares.
If an investor owns 10 shares of this company before the split, they have a total investment of 10 shares x ₹1,000 = ₹10,000. After the split, the investor will own 20 shares, but the price of each share will be halved to ₹500. The total investment value remains the same: 20 shares x ₹500 = ₹10,000.
What Are The Benefits Of Stock Split? – Quick Summary
- The main benefit of a Stock Split is making shares cheaper for regular investors. Though it doesn’t add value, it adjusts share prices on exchanges like BSE & NSE.
- Stock Split means a company divides its shares, making each cheaper without changing the total value. For example, a 2-for-1 split doubles shares and halves price, but the total investment stays the same.
- A stock split happens when a company increases the number of its shares, which makes each share cheaper. Existing shareholders own more shares, but the total value remains the same.
Stock Split Benefits – FAQs
1. What Are The Benefits Of Stock Split?
The main benefits of stock splits are increased affordability of shares for small investors, improved marketability, and enhanced liquidity in the market, while the company’s market capitalization and overall value remain unchanged.
2. What Is Stock Split?
A stock split is when a company divides its shares, increasing their quantity on the exchange. This lowers the price per share but maintains value for current shareholders, making them more accessible to potential buyers.
3. What Is An Example Of A Stock Split?
A company’s ₹2,000 stock undergoes a 2-for-1 split, doubling your 50 shares to 100 while halving the share price to ₹1,000, maintaining a total investment value of ₹100,000.
4. What Is The Difference Between A Stock Split And Stock Dividend?
The main difference between a stock split and stock dividend is that a stock split divides existing shares, while a stock dividend distributes extra shares. Despite similarities, they serve distinct purposes.
5. How Do I Calculate A Stock Split?
To determine post-split shares, multiply current shares by the split ratio. For instance, with 100 shares and a 2-for-1 split, you would have 200 shares post-split, maintaining the investment value.
