Contents
Definition
In a stock split, the face value of the existing shares is split, and the number of shares of the company increases proportionately, and the share price decreases. You don’t get new extra shares, but the same shares split.
E.g., suppose a company called ABC, whose share price is Rs 1000 and face value is Rs 10. If company ABC declares a 2:1 stock split, then after the split, one share of Rs 1000 will be split into two shares of Rs 500, and the face value of those two shares will also split and become Rs 5.
Let’s assume you have 100 shares of ABC.
| Before split | After Split |
| Number of shares= 100 | Number of shares= 200 |
| Current Market Price= Rs 1000 | Current Market Price= Rs 500 |
| Face value= Rs 10 per share | Face value= Rs 5 per share |
| Total investment value= Rs 1000 x 100 shares= Rs 1,00,000 | Total investment value= Rs 500 x 200 shares= Rs 1,00,000 |
Even after the split, your investment amount remains the same; only the number of shares increases and the share price reduces.
Objectives of the stock split
The stock split’s main objective is that by splitting the stock, the stock should be made affordable to more and more people so that small investors can also buy the stock, which in turn increases the demand for the stock. The supply is more or less similar, so the price will rise and increase the stock’s liquidity. When the share price goes up, some companies split the stock, but some companies do not split the stock even if the share price increases.
E.g., one share price of Berkshire Hathaway is currently trading at $ 3,02,500, i.e., around Rs 2,25,50,709.50, yet they have not done the split. Recently, Eicher motors had done the split, and before the split, the share price exceeded Rs 20,000, and now it is trading at Rs 2,086. A stock split is simply a technical change; some companies do; some companies do not.
Reverse split
Reverse split reduces the company’s number of shares and increases the share price. It is done to safeguard the companies from delisting or being without trading because of its low price. E.g., in 2011, Citigroup Inc needed $45 billion in US government bailouts to survive the financial crisis. It had done a 1-for-10 reverse split, and its stock fell immediately after the reverse split. If the company increases the share price by reverse stock split due to any other reasons, then you should think before investing in such companies because increasing the share price by the reverse split is not considered a good practice.
| Stock split | Bonus share |
| 1. The face value of the existing shares is split, and the number of shares will increase proportionately. | 1. The face value remains the same, and the company issues new extra shares to its existing shareholders. |
| 2. Less benefitted during dividend payout as the face value is split. | 2. More benefitted during dividend payout as the dividend is paid on the basis of face value. |
How to check the stock split of a company?
- Visit www.moneycontrol.com
- Search the name of the company for which you want to check.
- Go to Corporate action and click on Splits.
- You will get all the splits done by the company to date.
Conclusion
Many investors start investing in stock as soon as the company declares a stock split. In contrast, the stock split and reverse stock split are purely technical changes that have nothing to do with the company and its fundamentals. The value remains the same; only the number of shares will increase proportionately.
* Face value is the initial value of the shares held by the promoters of the company. It is the value that is written on the face of any financial document.
Also Read: Bonus shares: Meaning and explanation with examples