What are Stock Splits in India - Meaning, History, & How it Works
A Stock Split allows a company to reach out to more people without changing its ongoing value. But how does it work? And how does it benefit the company or its stakeholders? Watch our informational and easy-to-understand video from the #LearnWithUpstox series to get answers to all your queries.
I’m eating a cookie. But just because I’m breaking it into two, doesn’t mean I’m going to share it. Both pieces still belong to me. Both are going to end up in my stomach.
Let’s use this idea to understand stock splits. But first, let me finish eating this cookie.
Welcome to our new series, Learn with Upstox!
I’m Aaditya Iyengar and in this series, we’ll be discussing some key aspects of fundamental analysis, corporate actions and some important general concepts about the stock market.
Let’s discuss the topic of stock splits, in which we are going to talk about - what exactly are stock splits? And why does a company choose to opt for them?
Let’s get right into it.
What is a stock split?
Stock splits are amazing to make stocks more affordable and also improve the stock price. In this case, you need to understand a very important concept, which is face value. Stock splits are always done on the basis of face value. For example, if the face value of a stock is Rs. 10, and the company does a 1:1 split, every shareholder receives one extra share for each share that he/she owns, and the face value gets split in half. So, every shareholder with one share now has 2 shares and the face value of each share is now Rs. 5 from the older face value of Rs. 10.
Why does a company do a stock split?
Does this affect the stock price? Of course, it does! This is why it’s done in the first place. Laurus Labs recently did a 1:5 split, wherein the face value of each share split from Rs. 10 to Rs. 2 per share. Now, this makes the stock a lot more affordable for smaller retail investors. All us newbie investors always base the cost of a share on its share price and not its valuation. Rs. 1,500 seems a little too expensive for us but we’re willing to pay Rs. 300 for a share, ignoring that 10% on both stocks means the same rate of return.
You may be wondering; how does this improve the stock price?
Well, now an expensive stock has become affordable since it’s price has been reduced, so many retail investors end up participating, often causing a small rally. Many times, post split, and sometimes even just after the announcement of the split, the stock ends up rallying a little bit.
Do stock splits change the shareholding pattern of a company?
The final question, does this change the shareholding? If I own 1% of a company, will I own any less of it after the split? Definitely not. The split is uniform for all the shares across all the shareholders. Hence, it does not dilute the pattern of shareholding at all.
That’s it for now. Thank you so much for reading about stock splits, in our series, Learn with Upstox. I hope you learned something today.
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