What is a Stock Split?

A stock split is a corporate action in which a company divides its existing shares of a particular face value into multiple shares of reduced face value. Basically, companies choose to split their shares so they can lower the trading price of their stock to a range deemed comfortable by most investors and increase the liquidity of the shares.

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.

Most investors are more comfortable purchasing, say, 100 shares of Rs.10 as opposed to 10 shares of Rs.100. Thus, when a company's share price has risen substantially, many firms will end up declaring a stock split at some point to reduce the price (and the face value) to a more popular trading price. Although the number of shares outstanding increases during a stock split, the total value of the shares remains the same compared to pre-split amounts, because the split does not increase the market value.

When a stock split is implemented, the price of shares adjusts automatically in the markets. A company's board of directors makes the decision to split the stock into any number of ways.

For example, a stock split may be 2-for-1, 3-for-1, 5-for-1, 10-for-1, 100-for-1, etc. A 3-for-1 stock split means that for every one share held by you, there will now be three with one-third the existing face value. In other words, the number of outstanding shares in the market will triple. On the other hand, the price per share after a 3-for-1 stock split will be reduced by dividing the price by three. This way the company's overall value measured by market capitalization would remain the same.