A stock split is a corporate action that involves dividing existing stocks into multiple shares. It increases the number of shares, but the value of the total shares remains unchanged. Companies issue stock splits at a fixed ratio. For example, in a stock split of 2:1, each shareholder receives 2 shares for every one they previously held.

Why do companies perform stock splits?

Companies primarily perform stock splits to make stocks more affordable. It helps increase liquidity in the market. Lower share prices help attract more investors and potentially boost trading volume. It can boost the perceived affordability of the stock and improve market perception.

Is stock split good or bad?

Stock splits are usually beneficial for investors. Although it doesn’t create a direct financial gain or loss, in most cases, splits indicate that the company is confident about its position and seeking more capital to fuel its future growth. A stock split lowers the price per share, which helps attract more investors and improve liquidity for existing shareholders.

How does the stock split affect shareholder value?

A stock split is usually considered neutral for shareholders. A stock split doesn’t have a direct impact on the shareholder’s value. However, as the number of shares increases, the share price due to the stock split decreases proportionally.

Will a Stock Split Affect My Taxes?

A stock split does not create a taxable event, as you are simply receiving additional shares of the same value. Your total investment remains unchanged, but the cost basis per share is adjusted proportionally for future tax calculations.

Does the Stock Split Make the Company More or Less Valuable?

A stock split does not change the company’s fundamental value or market capitalisation. It only increases the number of shares and reduces the price per share, leaving overall ownership and value exactly the same.

Do Mutual Funds Split like Individual Stocks?

Yes, mutual funds can undergo a stock split, although it occurs less frequently than with individual shares. In such cases, the number of units increases while the net asset value (NAV) per unit decreases proportionally, keeping the total investment unchanged.

What Is Stock Split: Why Companies Split Their Stocks

When a company is concerned that its share price is pricey and wants to make the shares affordable, the corporate action it opts for is a Stock Split/Subdivision of shares. A stock split helps companies to appeal to new investors without any addition to the market cap. Let us see how a stock split works and how it impacts investors.

Key Takeaways

A stock split increases the number of shares while proportionally reducing the share price, keeping overall market value unchanged.

Companies use stock splits to improve liquidity, enhance affordability, and attract a broader investor base.

Forward and reverse splits alter share structure differently but do not affect fundamental value.

Investors should understand key dates, taxation rules, and long-term implications before evaluating any stock split.

What is a stock split?

A stock split is when a company issues more shares to its current shareholders by lowering the face value of each share at a specified ratio. It means that the number of outstanding shares is increased by dividing the existing shares originally issued to the present shareholders. Though there is an increase in the number of shares, the overall market capitalization of the company and the value of each shareholder’s stake remain the same. As mentioned above, the stock split happens in a specified ratio. For example, if the ratio is 1:5, it means that for every one share held the shareholder will get 5 shares respectively. Let us see illustrations in the below table to find the changes in the number of shares, share price and the face value of the share before and after the split for different ratios

Before Split					After Split
Stock split	No. of shares held	Share Price	Face Value	Value of Investment	No. of shares held	Share Price	Face Value	Value of Investment
1:2	10	900	10	9000	20	450	5	9000
1:5	10	900	10	9000	50	180	2	9000

Remember that in a stock split, the face value of the share decreases by the ratio of the split.

Forward Stock Splits

A forward stock split occurs when a company increases the number of its outstanding shares by issuing additional shares to existing shareholders in a fixed ratio. Although the total number of shares rises, the overall market capitalisation remains unchanged because the share price is adjusted proportionally.

For example, in a 1:5 split, each existing share is divided into five lower-priced shares. This process improves liquidity, makes the stock appear more affordable to retail investors, and helps keep the share price within a preferred trading range without altering shareholder value.

How Stock Splits Work

To understand how stock splits work, it is important to note that a split changes the share structure but not the company’s fundamental value. In a stock split, the company increases the number of outstanding shares by dividing each existing share according to a predetermined ratio, such as 1:2 or 1:5. As the share count rises, the price per share is adjusted downward in the same proportion to ensure the total market capitalisation remains unchanged.

For example, if a share priced at ₹1,000 undergoes a 1:5 split, it becomes five shares priced at ₹200 each. Shareholders therefore hold more shares, but the overall value of their investment stays the same. This mechanism enhances liquidity, makes the stock more accessible to smaller investors, and can help maintain an optimal trading range without altering ownership stakes or company worth.

Why Do Companies Split Their Stocks?

Understanding the meaning of stock split helps explain why companies choose this corporate action. A stock split is typically carried out to make a company’s shares appear more affordable and accessible to a wider pool of investors. When a share price becomes very high, retail investors may find it difficult to buy in, even though the company’s fundamentals remain strong. By increasing the number of shares and proportionally reducing the price, the company enhances liquidity and encourages greater participation in the market.

The meaning of stock split also extends to signalling confidence. Management often opts for a split when they anticipate continued growth, which can attract positive investor sentiment. While a split does not change the firm’s market capitalisation, it may improve trading volume and broaden the shareholder base, supporting smoother market activity.

How does a stock split affect you?

If you are an existing shareholder, a stock split may appear to have no noticeable effect but it eases your portfolio management and provides more liquidity with an increase in the number of shares If you are not a shareholder of the company that went for a stock split, you have an opportunity to buy the shares now at a lower price than before. For example, if IRCTC's share price was at ₹ 4500. After a stock split in the ratio of 1:5 in Oct-22, the share price of IRCTC would become ₹900 making it affordable for new investors and giving the existing shareholders flexibility to manage their portfolios.

Key dates in a stock split

Record date is the date on which the company checks its records to identify the eligible shareholders for a stock split. Ex- split date- is the date on which the stock starts trading at the new adjusted split price. The sub-divided shares will be credited with the new ISIN to the existing shareholders on the immediate next trading day after the record date.

Adjustment of Future & Options contract due to a stock split

After the stock split, the market lot and strike price for F&O contracts with the stock as underlying security will be revised by calculating the adjustment factor. Adjustment factor for Stock split of A: B is defined as (B/A). In the case of a stock split ratio of 1:5, the adjustment factor is (5/1) = 5. 1. Futures/Strike Price: The adjusted futures/strike price will be arrived at by dividing the old futures/strike price by the adjustment factor. 2. Market Lot: The adjusted market lot will be arrived at by multiplying the old market lot with the adjustment factor Let us consider the example of Jubliant Food Works that went for a stock split in the ratio of 1:5 in April 2022. Before Adjustment:

Instrument	Security Symbol	Expiry Date	Strike Price (₹)	Option Type	Long Position	Short Position
OPTSTK	JUBLFOOD	28/Apr/22	2750	PE	0	125
OPTSTK	JUBLFOOD	28/Apr/22	2750	CE	125	0

After Adjustment:

Instrument	Security Symbol	Expiry Date	Strike Price (₹)	Option Type	Long Position	Short Position
OPTSTK	JUBLFOOD	28/Apr/22	550	PE	0	625
OPTSTK	JUBLFOOD	28/Apr/22	550	CE	625	0

Remember that the investment value/ contract value of a future or options contract remains same after adjustment, due to a stock split.
Also Read, Futures & Options(F&O): Meaning, Types & Difference Explained

What is Reverse Stock Split?

A reverse stock split is when a company reduces the number of outstanding shares by increasing the face value of the share, without diluting the market cap. As in a stock split, the value of investment of the shareholder remains unaffected by a reverse stock split. Let us see an example of how reverse stock split works Say, you hold 10 shares of a company XYZ at a share price of ₹ 50. The total value of your investment in XYZ becomes ₹ 500. The company XYZ goes for reverse stock split in the ratio of 2:1. After the reverse stock split, you will now hold only 5 shares of XYZ. But the value of each share will now increase to ₹100, keeping your total investment at ₹ 500 like before. It is important to remember that a stock split makes a share affordable to new investors and provides flexibility to existing shareholders with a decrease in share price and an increase in the number of shares respectively. If you are watching a particular stock and if it goes for a split, it may provide you an opportunity to buy that stock at a lower price than before. The other corporate action in which the number of outstanding shares of a company increase is the Bonus Issue. Click here to know the differences between bonus shares and stock splits.

Advantages of Stock Splits

Conducting a stock split offers several benefits for both the company and its investors. Here's a breakdown of the key advantages of a stock split:

Boosts Liquidity: Splitting the stock enhances the total shares available in the market, potentially raising the trading volume of the stock. An increase in the number of shares traded can boost liquidity, facilitating easier buying and selling of the stock for investors.
Welcomes New Investors: Post-split, the reduced price per share can open up the stock to a broader investor base, which may have found the pre-split price too prohibitive. This can heighten demand for the stock and draw in new investors, potentially elevating the stock's value.
Creates a Sense of Affordability: By splitting its stock, a company can alter investor perception, making its shares seem more affordable. For instance, a stock priced at ₹1,000 might seem out of reach for some, but after a 2-for-1 split, the new price of ₹500 per share may appear more attainable.
Enhances Market Capitalisation: When a company splits its stock, the increased number of shares can lead to a rise in the company's market capitalisation. This might appeal to institutional investors who might have previously bypassed the company due to its smaller market cap.

Disadvantages of Stock Splits

Here are a few key downsides of a stock split that businesses and investors might want to keep in mind:

No Impact on Company Worth: When a stock is split, it doesn't alter the fundamental value of the business. The total market value, earnings, and basic financial health of the company stay the same before and after the split.
Increased Fluctuation: A stock split may lead to greater fluctuations in the stock’s price, potentially causing wider gaps between the buying and selling prices and more pronounced short-term price changes.
Sign of Financial Troubles: Sometimes, if a company decides to split its stock, it might be seen as struggling financially or not being confident about its future prospects. Such a view could negatively impact its stock price and how investors feel about the stock.

Example of Stock Splits

A notable example of a stock split in India from recent times involves Hindustan Aeronautics Ltd (HAL), which underwent a stock split in a 1:2 ratio. This split was approved by HAL's board, aiming to make the shares more accessible to a wider range of investors. As a result of the split, each existing equity share of HAL with a certain face value was divided into two shares, halving the face value of each share. Before the stock split, the shares were performing robustly in the market. Following the announcement and completion of the stock split in a 1:2 ratio, HAL's shares opened higher at ₹3739.50 on the BSE and experienced significant growth over the year. Specifically, the stock saw a 107% rise in one year, a 258% increase over two years, and more than a 400% increase over three years. BCL Industries also underwent a stock split, where one share with a face value of ₹10 was split into 10 shares with a face value of ₹1 each. Before the split, BCL Industries shares were in a base-building mode and had lost over 11% in one month. However, in the six months leading up to the split, the share price ascended from around ₹425 to ₹480 apiece levels, delivering a return of approximately 12% to its shareholders. In the year-to-date (YTD) period up to the split, BCL Industries' share price rose from around ₹324 per share levels to ₹480 per share levels, registering a rise of nearly 50%.

Calculating the Stock Splits in a Company's History

Calculating a company’s split history involves reviewing all past corporate actions to understand how its share count has evolved. For stock split companies, each split ratio is applied sequentially to determine the cumulative effect on both share quantity and adjusted share price.

For instance, if a firm completes a 2:1 split followed by a 3:1 split, the original shareholding is multiplied by 6, while the price is reduced to 1/6 of the pre-split level. This method helps investors track how companies with stock split have altered their share structure over time without changing overall market value.

Conclusion

Stock splits can make shares more accessible to a wider range of investors, potentially increasing a company's stock liquidity. While this offers advantages like making shares appear more affordable and enhancing trading volumes, it's essential to understand that the intrinsic value of the company remains unchanged. For those intrigued by the dynamics of stock splits and looking to dive into the stock market, opening a Demat account with Angel One could be a strategic first step. Ready to embark on your investment journey? Explore Angel One for more details on how to get started.