Term

Stock Split Meaning and Example

A stock split increases the number of shares and reduces the price – without changing the market value of a company.

A stock-split of 1:2 is like cutting a fruit into two pieces. The quantity of fruit will be the same, but there will be two pieces instead of one.

For example, if Reliance Industries does 1:2 share split – the number of shares will double, but the stock price will reduce by half.

Check out the table below:

Reliance
Industries
Shares
Before Split
Share Price
Before Split
Shares
After Split
Share price
After Split
1:2 Split10₹ 150020₹ 750
1:3 Split10₹ 150030₹ 500
1:4 Split10₹ 150040₹ 375
1:5 Split10₹ 150050₹ 300

1:2 Split means for every 1 share held in your demat account, you will get 1 extra share of the same company. 1:3 would mean – for every 1 share held, you will get 2 shares.

Note: Stock Split directly affects the Face Value of the share. If the Face Value of Reliance Industries is ₹ 10 and the company does 1:2 split, the Face Value after the split will be ₹ 5.

Reason for Stock Split

Stock Split is no-gain and no-loss for investors. But when stock prices come down by half, it becomes more affordable for people to buy the share.

Another example: On January 9 2020, each share of MRF (Tyres) costs more than ₹ 66,750. Very few small investors can afford to buy MRF shares. Even though they like the company, many investors might feel the price is too high.

If MRF decides to do 1:10 Split, the share price will reduce to a little more than ₹ 6,600 – this would make the stock price much more affordable for investors.

Also, after the split – because there are more shares of the company in the market – the volume will increase. And because the price has become more affordable, more investors will participate in buying and selling – thereby creating more liquidity in the stock.

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