Stock splits are corporate actions in which a company increases the number of its shares by dividing existing shares, without changing its overall value. Companies usually opt for stock splits when share prices rise significantly, making them seem less accessible to everyday investors.
By lowering the per-share price, stocks may appear easier to buy and trade. Understanding the advantages and disadvantages of stock splits helps investors look beyond price changes and focus on what really matters—business fundamentals and long-term value.
Key Takeaways
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A stock split increases the number of shares while keeping the company’s total value unchanged.
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Lower share prices after a split can improve liquidity and attract more investors.
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Stock splits create psychological appeal but do not change business fundamentals.
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Companies use splits to maintain affordability and trading activity.
What Is a Stock Split?
A stock split is when a company increases the number of its shares by dividing each existing share into multiple new shares. This is done without changing the company’s total market value. Only the share count and price change, while ownership value remains the same.
For example, in a 1:2 stock split, one share priced at ₹1,000 becomes two shares priced at ₹500 each. In a 1:5 split, one share of ₹2,500 turns into five shares of ₹500 each. In both cases, the total investment value stays unchanged.
Stock splits are mainly used to make shares look more affordable and easier to trade, especially for small investors.
Read More: What is Stock Split?
How Stock Splits Affect Share Price & Market Cap
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A stock split increases the total number of shares available in the market. When a company announces a split, each existing share is divided into multiple shares based on the split ratio.
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The share price adjusts downward in the same proportion. If the number of shares doubles, the price per share is roughly halved, keeping the overall value unchanged.
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The company’s market capitalisation does not change because the total value of all shares remains the same before and after the split.
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One of the key advantages of stock split is improved liquidity. With more shares available at a lower price, buying and selling becomes easier.
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Another advantage of stock split is better perceived affordability. Lower-priced shares often feel more accessible to retail investors, even though the company’s fundamentals stay the same.
Also Read: What is Reverse Stock Split?
Key Advantages of Stock Splits for Investors
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One major advantage of stock split is increased liquidity. When share prices fall after a split, more investors can participate, which usually leads to higher trading volumes and smoother buying and selling.
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Stock splits create a positive psychological impact. Lower share prices often appear more affordable, making investors feel comfortable purchasing shares even though the company’s actual value has not changed.
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Another important advantage of stock split is higher retail investor participation. Smaller investors who earlier found the stock expensive may now find it easier to invest in smaller quantities.
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Stock splits often generate positive market sentiment. They are commonly seen as a sign of management confidence and steady business growth, which can attract additional investor interest.
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Improved visibility and attention is another benefit. Stock splits tend to draw media and market attention, helping the company stay in focus among investors.
Why Companies Prefer Doing Stock Splits
In a perfectly efficient market, Stock Splits should not affect a company’s total market value or an investor’s wealth. The overall market capitalisation, ownership percentage, and business fundamentals remain unchanged. It is often compared to cutting a pizza into smaller slices—you get more pieces, but the size of the pizza stays the same.
Despite this, companies still prefer Stock Splits for several practical reasons:
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Maintaining an ideal price range: Companies often split shares to keep prices within a range that feels reasonable and attractive to investors.
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Lower prices attract more investors: A reduced share price appears more accessible, especially to retail investors.
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Improved liquidity: Lower-priced shares usually trade more actively, increasing market participation.
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Positive signalling: Stock splits may signal management’s confidence in future growth.
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Higher visibility: Splits often draw attention from investors and the broader market, increasing interest in the stock.
Disadvantages & Risks Associated with Stock Splits
Stock splits may appear beneficial at first glance, but they also involve certain risks that investors should not overlook. Understanding these drawbacks helps avoid decisions based purely on price changes rather than real value.
Higher Administrative and Compliance Costs
One of the key disadvantages of stock split is the cost involved for the company. A stock split requires legal approvals, regulatory filings, documentation, and communication with shareholders. These activities add to administrative expenses and do not contribute directly to business growth, especially for smaller companies.
Increased Volatility After the Split
Stock splits can sometimes lead to higher price fluctuations. Lower share prices may attract short-term or speculative traders, which can cause sharper ups and downs in the stock price. This increased volatility may not suit investors who prefer stable, long-term investments.
False Perception of Being “Cheaper”
Another disadvantage of stock split is the misunderstanding it can create among investors. A lower share price after a split may appear more attractive, even though the company’s valuation and fundamentals remain exactly the same. This can lead to inflated demand based on perception rather than real value.
No Change in Fundamental Value
A stock split does not improve earnings, profitability, or business performance. If the company’s fundamentals are weak, the positive effects of a split are likely to be short-lived. Price movements driven by a split often fade over time without strong financial support.
Reduced Relevance in Modern Markets
SEBI is testing fractional share trading through its innovation sandbox, which could eventually allow investors to buy small portions of high-priced shares. However, this service is not yet available in the Indian equity markets, as legal amendments to the Companies Act remain pending. Once implemented, fractional investing could reduce the practical importance of stock splits in the long term.
Stock Split vs. Bonus Issue
Both a stock split and a bonus issue increase the number of shares held by investors, but the reason and accounting treatment behind them are different. The table below explains the key differences in a simple way.
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Basis |
Stock Split |
Bonus Issue |
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Meaning |
Existing shares are divided into smaller units |
Free additional shares are issued to shareholders |
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Impact on Share Price |
Share price reduces proportionately |
Share price adjusts downward |
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Impact on Market Value |
No change in market capitalisation |
No change in market capitalisation |
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Source |
No use of company reserves |
Issued from accumulated reserves |
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Main Purpose |
Improve affordability and liquidity |
Reward shareholders |
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Accounting Effect |
Changes face value of shares |
Increases share capital |
In a stock split, only the face value and share count change, while ownership remains the same. A bonus issue, on the other hand, reflects the company’s accumulated profits being converted into equity. Both actions are neutral in value but serve different corporate objectives.
Read More: Stock Split vs Bonus Issue
How Investors Should React to a Stock Split
A stock split often attracts attention, but it should not automatically influence an investment decision. Investors need to respond thoughtfully by focusing on value rather than price movements.
Focus on Business Fundamentals
When a stock split is announced, investors should first review the company’s financial health, earnings growth, and long-term prospects. A split does not improve business performance, so decisions should be based on fundamentals, not price changes. Understanding the advantages and disadvantages of stock splits helps keep expectations realistic.
Review the Company’s Past Performance
Looking at the company’s track record before and after earlier splits can offer useful context. Some companies grow steadily after splits, while others show only short-term price movement. This comparison helps investors judge whether the split aligns with long-term growth.
Avoid Emotional or Impulsive Buying
Lower post-split prices may create urgency or excitement, but emotional buying can lead to poor decisions. Investors should remember that affordability does not equal value. Awareness of the advantages and disadvantages of stock splits helps avoid being influenced by market noise.
Maintain a Long-Term Perspective
Stock splits are structural changes, not value creators. Investors should stay focused on long-term goals and hold or buy shares only if the company fits their investment strategy.
Also Read: What are Bonus Shares?
Real-Life Examples of Famous Stock Splits
Stock splits have been used by several well-known companies to manage rising share prices and improve accessibility. These examples show how splits affect trading without changing a company’s underlying value.
Global Company Examples
Well-known global companies have used a stock split to manage rising share prices and improve accessibility. Apple has carried out multiple stock splits over the years as its share price increased steadily. Each split reduced the per-share price, making it easier for a wider group of investors to participate, while the company’s overall value remained unchanged.
Similarly, Tesla announced a stock split after strong price growth. The move increased liquidity and attracted more retail investors, even though the business fundamentals stayed the same.
Indian Market Examples
In India, companies have used stock splits to enhance accessibility. For example, IRCTC executed a 1:5 stock split in October 2021. More recently, Nestle India completed a 10:1 stock split in January 2024 and later announced its first-ever 1:1 bonus share issue in June 2025. Other notable 2025 stock splits include Tata Investment Corp's 10:1 split in October.
On the other hand, MRF is often cited as a company that has avoided a stock split despite its high share price. This highlights that a stock split is a strategic choice, not a necessity.
Tax Implications of Stock Splits (India)
Stock splits often raise questions about taxation among investors. Understanding how they are treated under Indian tax rules helps avoid confusion during future capital gains calculations.
No Immediate Tax Liability
In India, a stock split does not create any immediate tax obligation for investors. Receiving additional shares due to a split is not treated as income, so no tax is payable at the time the split takes place. This is an important point when evaluating the advantages and disadvantages of stock splits, as many investors mistakenly expect a tax impact.
Adjustment in Cost of Acquisition
Although there is no instant tax, the cost of acquisition is adjusted. The original purchase cost of the shares is spread proportionately across the increased number of shares after the split. This revised cost becomes relevant when the shares are eventually sold.
Impact on Capital Gains
Capital gains tax is calculated based on the adjusted cost and the holding period. The holding period of the original shares continues unchanged, meaning the split does not reset the investment timeline. Understanding this helps investors calculate future tax liability accurately and avoid confusion during tax filing.
Should You Buy Before or After a Stock Split?
A stock split often creates excitement in the market, but it does not change a company's real value. The decision to buy should depend on business strength, not the timing of the split.
Buying Before a Stock Split
Buying shares before a split does not offer any special financial advantage. While some investors expect price movement around the announcement, a split itself does not increase earnings or valuation. Market sentiment, rather than fundamentals usually drive any short-term rise.
Buying After a Stock Split
After a split, shares may appear more affordable due to the lower price. This improved accessibility is one of the main advantages of stock split, especially for retail investors. However, the company’s value remains the same, so purchases should be based on long-term prospects rather than the split event.
Conclusion [
Stock splits can improve liquidity, increase investor participation, and make shares appear more affordable, but they do not change a company’s true value. While these benefits can attract short-term attention, investors must also recognise the disadvantages of a stock split, such as higher volatility and the risk of misinterpreting price changes as real value. In the long run, business fundamentals, financial performance, and growth prospects matter far more than how a share price is divided.
