What is a Stock Split?

Stock Split is a Corporate Action (CA) in which the Stocks/Shares are Split into smaller lots. The Face Value of the Share decreases after a Stock Split and hence the number of Shares in the Market increases.

A company goes for a Stock Split usually when the price of the Share/Stock is too high.

Now, you might wonder, what is wrong in having a high Share Price. After all, it reflects the good health of the company. But the problems comes in the form of decreasing Liquidity. Since the price is too high, investors find it hard to afford the shares in that particular company and hence the trading in that particular stock decreases.

Stock Splits increase the liquidity of that particular stock and make it possible for investors to trade in the stock.

One important thing to note in a stock split is that the value for the investor does not increase or decrease because of a stock split. Even thought the Share Price might look like it has dropped considerably, it is purely because of the fact that the Face Value of the Individual Stock have come down.

Consider the following Example.

Company Name : ABC

Market Value of Stock : $1500

Face Value of Stock : $100

Corporate Action Announced : Stock Split (1:10)

Stocks of Company ABC were trading at $1500 per Share. Since, the high price of the share affected liquidity of this particular stock, Company ABC decided to announce a 1:10 stock split.

In other words, every single share of Company ABC will be divided into 10 shares. The stocks of the company ABC which had a Face Value of $100 before the Stock Split will only have a Face Value of $10 after the Stock Split.

The Market Value of the Stock will also be divided accordingly. The market value of the stock after the Stock Split would be somewhere around $150.

However, an investor who was holding 200 shares of the company ABC will still hold the exact same ownership over the company.

How does this happen?

An investor who was holding 200 shares with a Face Value of $100 each before the stock split will be holding 2000 shares with a Face Value of $10 each after the Stock Split.

Hence, the equity (ownership) that the investors holds in the company ABC remains unaffected by the Stock Split.

If you have any comments or ideas that you would like to share with regard to Stock Splits, please do leave a comment in the comment section below.