A stock split is a common occurrence in the stock market that allows companies to adjust the price of their shares without changing the overall value of the business. It might seem complex, but understanding stock splits can be important for both new and experienced investors.
While investing in the stock market or engaging in online trading in India, knowing how stock splits work can help you make better decisions. They can impact your portfolio in unique ways, creating potential opportunities for growth. Being aware of these changes is crucial for successful trading and long-term investment planning. Read this blog to know more about the advantages of stock split and its meaning.
A stock split is a corporate action where a company increases its number of shares by reducing the face value of each share. This is often done to make shares more affordable, increasing liquidity in the market. Despite the reduction in price per share, the total value of your investment stays the same.
When a company splits its shares, the face value of the stock decreases, but the number of shares you own increases proportionally. For instance, if a stock with a face value of ₹10 undergoes a 2:1 split, the face value drops to ₹5. You would now own double the number of shares, but your total investment remains unchanged. The split shares are usually credited within two days.
If you are already a shareholder, a stock split might seem to have little immediate impact. However, it does offer several benefits. It makes your portfolio easier to manage by increasing the number of shares you hold, which can enhance liquidity. Essentially, you will end up with more shares at a lower price per share, but the total value of your investment remains the same.
For those not currently holding shares in the company that has undergone a stock split, this can be an opportunity to invest at a more affordable price. The reduced share price can make it easier for new investors to enter the market.
For instance, if HUL’s share price was ₹4000 and the company implemented a 1:5 stock split in October 2024, the new share price would be ₹800. This makes the shares more accessible for new investors while allowing existing shareholders greater flexibility in managing their portfolios.
When a company announces a stock split, several important dates come into play. These dates ensure a smooth transition during the stock split process. Take a look at them:
A stock split can offer several advantages to investors and companies alike. A stock split leads to better stock marketability and makes it more manageable for investors, benefiting both the company and its shareholders. Here’s how it can be beneficial:
One of the main advantages of a stock split is improved liquidity. When a company splits its shares, the number of shares available increases, which can make trading easier. This higher volume of shares often leads to more active trading and can help narrow the bid-ask spread.
After a stock split, the share price is adjusted downward. This lower price can make the stock more accessible to a broader range of investors. It can attract new investors who were previously deterred by the higher price, potentially increasing the stock’s trading volume.
For existing shareholders, a stock split provides more shares at a lower price, making it easier to manage their portfolios. The split can also give investors flexibility to adjust their holdings without impacting the total value of their investment.
Companies choose to split their stock for several reasons. One primary motive is to make shares more affordable. When a stock’s price becomes very high, it can deter potential investors. By splitting the stock, the company lowers the price per share, which makes it more accessible to a wider range of investors.
Another reason for a stock split is to increase liquidity. More shares available in the market can lead to more active trading and can help narrow the bid-ask spread. This enhanced liquidity can benefit all investors by making it considerably easier to buy and sell shares.
Additionally, a stock split can signal confidence in the company’s future. It often reflects a positive outlook on growth and can attract attention from new investors, contributing to the overall marketability of the stock.
A reverse stock split reduces the number of shares a company has in circulation. For instance, if you own 10 shares of a company and the board implements a 2-for-1 reverse stock split, you would end up with 5 shares. Even though you now have fewer shares, the total value of your investment stays the same.
To illustrate, if each of your 10 shares were worth INR 306 before the reverse split, the value of each share would rise to INR 613 after the split. Despite the increase in the share price, the overall value of your holdings remains unchanged. If the total value of your shares was INR 3060 before the split, it will remain INR 3060 after the split, reflecting no real gain or loss in value.
Investing in stocks that undergo changes, such as splits or reverse splits, can offer valuable advantages. These adjustments often enhance liquidity and make shares more accessible, providing better opportunities for both new and existing investors. The increased affordability and adjusted share prices can lead to a more dynamic trading environment, potentially benefiting your investment strategy.For those interested in exploring these opportunities, leveraging a good investment platform is essential. Consider using Ventura to stay ahead in the evolving stock market landscape and make informed decisions with ease. Ventura provides a seamless experience for online trading in India, allowing you to manage and grow your investments efficiently.
For android only