what is a stock split?
When a company lowers the price of its stock by splitting each existing share into more than one share, it is termed as a stock split. The new price of the shares correlates to the new number of shares and the value of the shareholders’ stock doesn’t change. Moreover, the company’s market capitalization is still the same.
Companies perform stock split for lowering the individual share price of the company. A lower share price can make the stock more attractive to a broad range of investors.
What Are Stock Splits?
Stock splits happen when a company decides to split one share of its stock into more shares. A company might take one share of stock and split it into two shares. The total combined value of the two new shares still equals the price of the previous one share. For example, if Company QWE completed a 2-for-1 stock split, and the original share price was Rs 200 for one share, the new shares would each be priced at Rs 100.
How Does Stock Splits Work?
Publicly traded companies, including multi-billion dollar blue-chip stocks, do this all the time. The firms grow in value thanks to acquisitions, new product launches, or share repurchases. At some point, the quoted market value of the stock becomes too expensive for investors to afford, which begins to influence the market liquidity as there are fewer and fewer people capable of buying a share.
Let’s say a Company ASD announces a 2-for-1 stocks split. Before the split, you own 100 shares priced at Rs 80 each, for a total value of Rs 8,000. After the split, your total investment value remains the same at Rs 8,000, because the price of the share is marked down by the divisor of the split. So an Rs 80 stock becomes Rs 40 share after the 2-for-1 split. Post-split, you now own 200 shares priced at Rs 40 each, so the total investment is still worth the same Rs 8,000.