• HDFC securities
• 05 Jan 2023
• Knowledge Centre

When a company’s share price seems to be more costly on an absolute basis, the company may intend to go for a stock split or subdivision of its shares , making it more liquid and affordable in the market.

A stock split is a corporate action announced by the board of directors to attract new investors without any change in the market capitalisation. When a stock split, or a share split, happens, the number of shares is increased by reducing the face value of the stock .

The market price of the stock reduces and the number of outstanding shares in the market increases in the ratio of the stock split announced. This makes the shares more affordable to retail investors and increases liquidity. However, the total investment value of an investor remains the same.

Let us understand stock split meaning with an example.

For instance, the face value of a company’s stock is Rs 10. The company announces a stock split in the ratio of 5:1, i.e., a 5-for-1 share split. This means, if you hold 1 share of a company of Rs 10 face value, you will receive 5 shares of Rs 2 each after the split. Here, your investment will remain the same as the number of shares increases 5 times, but the value of each share decreases to one-fifth.

It is essential to understand the key dates for the implementation of a stock split.

Record Date: A Record date is a date on which the company identifies the registered shareholders eligible for a stock split. Only those investors who hold shares of a company in their Demat account on the record date are eligible for the stock split.

Ex-Split Date: An Ex-split date is when the stock begins trading at the new adjusted price after the split.

The new split shares or the subdivided shares are credited to the existing shareholders’ accounts on the next trading day after the record date.

Advantages of Stock Split

Check out some of the advantages of a stock split for the company as well as investors:

A stock splits increases the number of outstanding shares, thus improving the liquidity of shares in the market. The low-priced shares come into the trading range of investors and so can be traded more, thus, enhancing liquidity.

Stock splits ease portfolio management for shareholders. It makes it easier to rebalance the portfolio with low-priced stocks that are easily tradable and more liquid.

If an investor is not a shareholder of a company, the announcement of a stock split gives him an opportunity to invest in the company’s shares at a lower price than before.

In conclusion, a stock split leads to an increase in the stock’s affordability and investor participation, which in turn, helps better price discovery. Improved liquidity always finds favour with retail investors.