What is a Stock Split?

A stock split refers to dividing existing shares into multiple shares in a fixed ratio. After the split, the share price falls proportionately, while the investor owns more shares. The company’s market capitalisation stays the same. This action does not affect company earnings or fundamentals. 

How Does a Stock Split Work? 

After understanding what is meant by stock split, here is how it works: 

• The company announces a split ratio. 
• The record date is set to identify eligible shareholders. 
• Existing shares are divided as per the ratio. 
• Share price adjusts in the same proportion. 
• Total investment value remains unchanged. 

How Does a Stock Split Affect Investors? 

A stock split may not appear to impact existing shareholders, but as the number of shares increases, portfolio management becomes easier, and liquidity is improved. In case the person is not a shareholder of the company that did a share split, they can buy shares now at a lower price.  

For example, if ABC company's stock price was Rs. 4500. After a share split in the ratio of 1:5, the share price of ABC company would become Rs. 900. Thus, making it affordable for and giving the flexibility to manage portfolios. 

Types of Stock Split 

The following are the two types of stock split. 
 

1. Forward Stock Split: 
   A forward stock split increases the number of shares and lowers the price per share. It is usually done to improve liquidity. 
   
   Example: A 2-for-1 split turns 1 share priced at ₹1,000 into 2 shares priced at ₹500 each. 
   
    
2. Reverse Stock Split: 
   A reverse stock split reduces the number of shares and increases the price per share. It is often used to raise the share price. 
   
   Example: A 1-for-5 split turns 5 shares priced at ₹100 into 1 share priced at ₹500. 

Advantages & Disadvantages of Stock Split 

After understanding what is split in stock market, it's important to understand the advantages and disadvantages of a stock split: 

Conclusion 

A stock split changes only the number of shares and their price, not the actual value of an investment. Shareholders receive more shares, while the company’s market worth remains the same, a change that is clearly reflected on an online trading app. This action is often linked to price accessibility rather than business growth. Investors should focus on company performance, financials, and long-term prospects instead of viewing a stock split as a value increase.