Stock split means division of shares. In simple words, it means breaking any stock into two or more parts. The company does not issue new shares in this, rather the existing shares are divided or split in this. Suppose a company announces a stock split in the ratio 1:2. This means that if you have one share of that company it will become two shares. Whereas, the number of 100 shares will be 200 after the split.
Explain with best practical example and How It Works
The board of directors of Filatex India Limited, a company in the textile sector, has fixed December 28 as the record date for the stock split. At the same time, its ex-date is 27 December. The board of the company has announced that the shares will be split in the ratio of 1:2.
This means that the number of 100 shares will become 200 after the split. However, the money you have invested will not be affected due to the stock split. Its face value will change from the existing face value of Rs 2 per equity share to Re 1. In November 2022, the company informed the Indian exchanges regarding the stock split that the company’s board has decided to stock split in its meeting to be held on 8 November 2022.
What is the benefit to the shareholder?
When a company splits its shares in two, the shareholder is given one additional share for each share he holds. This doubles the number of shares already held by the stock holder. This does not affect the value of the investment, as a split of two shares each halves the value of each share.
What is the impact on the company ?
Explain that the share split increases the number of shares of the company. But this does not affect the market capitalization of the company. On the other hand, stock split makes the company’s shares more liquid. Many times people consider stock split as the same as bonus shares. However, these two are different things.
Why do stocks rise with Stock split?
Stock split reduces the price of the shares of the company. The attractiveness of the stock increases in the market. It is believed that the company has made the stock very cheap in terms of valuation. That’s why it is easy for small investors to invest in it. In such a situation, when the demand increases, the stock prices rise again. A rally can be seen in that stock for a few days or weeks.