What is stock split?
Samir owns 100 shares of Z corporation valued at 500 rupees per share.His total investment is thus 50 thousand rupees.
He has just heard that Z corporation has decided to go for a stock split. So he asked his friend Vinod, a seasoned investor with Angel Broking to explain.
Z corporation has decided to increase its number of shares by issuing more shares to current shareholders. Samir gets one additional share for every share that he already owns. This is a one-for-one stock split but the price of each share is now half of the previous value, that is, 500 divided by 2 equal to 250 rupees. So though the number of shares that Samir owns has increased from 100 to 200, the total value of his investment remains the same, that is, 250 rupees into 200 shares.
Why do companies split their stock?
- To make their shares more affordable to small investors.
- Also, the lower share price makes the stock more liquid, that is, easier to buy and sell.
Remember, the company’s market Capitalization, that is, the total value of all its outstanding shares remains the same even after the split.
Thanks to Vinod, Samir now understands what stock split is all about.