What Is Stock Split for investors ?

To have a wide investor base, companies attract individual investors to invest in their company. If shareholder base is bigger, chances of getting companies ownership to small group of investors is less. In order to attract small investors, companies go for stock split.

Stock split means dividing company’s current outstanding number shares into multiple numbers of shares and proportionately adjusting its current market share price to compensate investors.

In this process, management keeps the nominal quoted market value of shares in between a sweet or attractive range which allows small investors to hold 100 to 200 numbers of shares.

This means, by increasing number of shares in market, the value of shares will come down to a reasonable level which will make the stock inexpensive. As a result more investors can afford to buy company’s stock at a general lot size of 100 or 200. Gradually these average investors can accumulate by increasing their share holding

Post stock split market price is generally decided in comparison to similar companies in their sector.

In stock split, aggregate value of shares remains the same as before the split. Only price and number of shares changes by keeping the rupee value of shares unchanged compare to pre-split amounts.

Also Read: Dividend Payout Ratio – Calculation with Example

For instance, if you own 1,000 number of shares of ABC Company with a current market price of Rs. 100 per share, for a stock split of 10-for-1, stock price will be reduced from Rs. 100 to Rs. 10 each and number of shares will be increased proportionately.

In our case, you would own 10,000 numbers (i.e. 1000 * 10) of shares at a price of Rs. 10 each (i.e. 100/10). Net financial impact in the hands of shareholder will remain the same i.e. in our case it’s Rs. 1,00,000.

It’s not necessary that stock split ratio should only be 10-for-1. The most common split ratio is, 3-for-2, 2-for-1 or 3-for-1.