What is Stock Split: Why Companies Split Their Stocks?

Every investor keeps one eye on the share market in search of shares that would yield high profits. However, there are situations when investors may not be able to purchase shares of a highly desired company. The high share price is the cause. These are the moments when companies choose to split their shares.

Stock splits are typically done to make the stock more affordable for investors. For example, if a company’s stock is trading at 10,000 INR per share, a 2-for-1 stock split would halve the price to 5000 INR per share. This makes the stock more accessible to a wider range of investors, and it can also boost the stock’s liquidity. 

There are a few different reasons why a company might choose to split its stock. Sometimes, the split is done to make the stock more affordable for investors. In other cases, the split boosts the stock’s liquidity. And in some cases, the split is done to signal to the market that the company is doing well and is confident about its future. 

Stock splits can be a positive thing for investors. They can make the stock more affordable and boost liquidity, leading to more buying and selling activity.

What is a Stock Split?

In simple words, a stock split meaning is that it is a company move in which a company splits its current shares into a number of new shares. A stock split alters the price of the shares but not the company’s worth.

The new shares are typically proportionately issued to shareholders, meaning that each shareholder will end up with more than they had before the split. For example, if a company has 100 shares outstanding and declares a 2-for-1 stock split, each shareholder will end up with 2 shares for every 1 share they owned before the split.

Stock splits are typically done to make shares more affordable for investors since the price of each share will be lower after the split. Companies may also declare stock splits to boost the liquidity of their shares, making it easier for investors to buy and sell them. Finally, stock splits can also be used to signal that a company’s management is confident in its future prospects.

Why do Companies Split Their Stocks?

Now that you know what is a stock split, you might wonder why companies split their stock. The main goal of a stock split is to increase the company’s liquidity and, as a result, lower the price for investors. When businesses realize that their shares’ pricing is too high or exceeds the price ranges of similar businesses, they turn to stock splitting.

Companies may generally split their stocks to make them more affordable for investors or boost their share price.

For example, if a company has 100 shares and splits them into two, each investor would own two. A company may also reverse split its shares, which is when it decreases the number of shares.

Stock splits often indicate that a corporation is performing well, implying that it may be a smart investment. Furthermore, they are more reasonable, and you may be able to purchase more shares due to the reduced price per share.

What is Reverse Stock Split?

A reverse stock split is a corporate move in which a company’s stock is reduced in multiple and the shareholders are given proportionately more shares. The total number of outstanding shares remains the same, but each share is worth more. 

A reverse stock split is often done to increase the per-share value of the stock, making it more attractive to potential investors. It can also be done to reduce the number of outstanding shares, making it easier for a company to buy back its stock.

Companies can adopt several corporate activities that may influence their capital structure based on market trends and situations. One is a reverse stock split, in which existing company stock shares are combined to produce a lower number of proportionally more valuable shares. Companies don’t add value by reducing the number of outstanding shares. Thus the per-share price rises proportionately.

Conclusion

It’s crucial to remember that a share split, which lowers share prices and raises the number of shares, respectively, makes a share accessible to new investors and gives existing owners freedom. You may get the chance to purchase a certain stock at a reduced price if it splits while you are keeping an eye on it.

Therefore, as noted by market analysts, the share’s price movement following the share split relies on market factors and corporate fundamentals. So, remember the two factors above before buying a share following a company split. 

There will constantly be a range of opinions on the market regarding stock splits. To add one extra thing, a bonus should not be confused with a stock split. While a stock split halves the company’s authorized share capital, the allocation of bonus shares only affects the issued share capital.

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