What is Stock Split
In Stock market Stock Split happens when a company decides to increase the number of its shares in order to boost the stock’s liquidity by dividing one of its stocks into a number of shares but the market cap remains the same. Stock Split is a process of dividing existing shares of a company into multiple shares.
For example - A company TCS might take one share of stock and split it into three shares. The total combined value of the three new shares still equal to the price of the previous one share. For instance, if TCS were to complete a three-for-one stock split, and the original share price were Rs.30 for one share, the new shares would each be priced at Rs.10 Thus, an investor who previously hold 50 original, Rs.30 shares would then 150 shares at the new price of Rs.10.
Reasons behind Stock Split
There are some reasons to carry out the Stock split process.
1. Increase Liquidity- One of the primary reasons for stock split is to increase liquidity. Often the share of a company may be too high to buy for investors and any further rise in prices can discourage them from buying/selling the stock. So, by reducing the value of a stock by stock splitting the share became accessible to all.
2. Increase Stockholder Base- Through stock split the number of outstanding shares of a company increases and it gives opportunity to other investors to purchase the shares. This helps to increase the stockholder base of a company.
3. Perception of Future Growth- Company that is going for stock split is perceived to be a growing entity. Generally, it is a common perception among the investors that if company goes for stock split it has plans for growth, and this will help to create a positive image of the company.
Effects of Stock Splits
As the name suggests stock split also have effects on the company so let’s understand those effects. With stock split, the number of stocks in portfolio for a company gets multiplied as per the decided ratio. According to the split ratio, the earning per share is impacted.
For example- if the stock split ratio is 2:1, then the overall earning in your portfolio for the number of shares you took before and after the stock split process will not change.
Pros and Cons of Stock Split
Help in portfolio for rebalancing
Not all stock split increases the share price
Make selling put options cheaper
Increase share price
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