What is a Stock Split, how does it work, and its advantages

Have you ever stumbled upon news of a "stock split" and felt like you were reading an alien language? Well, worry no more! This blog is your friendly guide to understanding this confusing, yet potentially exciting, event in the Indian stock market. So, be attentive and get ready to decode the mystery of stock splits.

What is a Stock Split? 

Imagine you own a slice of a delicious pizza. Now, picture the chef cutting that slice into smaller, bite-sized pieces. That's essentially what a stock split does! It's a corporate action where a company decides to increase the number of outstanding shares by splitting each existing share into a smaller number of shares.
 

But why would a company do a stock split?

There are several reasons, but mainly, it's about making the stock more accessible and appealing to investors. Let's break it down:

Increased Liquidity 

More shares in circulation means it's easier for people to buy and sell the stock, making it more "liquid." This can attract new investors, boost trading volume, and even increase the stock price.

Psychological Appeal 

Smaller share prices can appear more affordable, especially for retail investors. This can entice them to buy more shares, further increasing demand and potentially pushing the stock price up.

Management Signaling

A stock split can be seen as a sign of confidence from management in the company's future prospects. This positive sentiment can again attract investors and boost the stock price.

How Does a Stock Split Work?

Here's where things get interesting. Let's say you own 100 shares of a company, and each share has a face value of Rs. 10. This means the company initially offered each share for Rs. 10. Now, let's say the company announces a 2-for-1 stock split.

Here's what happens:

• Your 100 shares are divided into 200 shares. Each new share represents the same ownership portion of the company as your original shares. Think of it like cutting a pizza into smaller slices – each slice still represents the same portion of the whole pie.
• The face value remains unchanged. While the number of shares doubles, the face value of each share stays at Rs. 10. It's like dividing the same amount of dough (company value) into more cookies (shares) – each cookie (share) is smaller but still has the same "doughy" value (face value).
• The stock price adjusts proportionately. Since the total value of the company remains the same, the market price per share automatically adjusts after the split. In this case, if the pre-split price was Rs. 100, the post-split price would be Rs. 50. This ensures that the total value of your holdings (number of shares x price per share) remains the same before and after the split.

A stock split doesn't change the company's underlying value or your ownership percentage. It simply makes the individual shares more affordable and potentially increases trading volume.

Do remember:

Your total ownership percentage in the company remains the same after the split. You may have more shares, but each share represents a smaller portion of the company.

The total company value remains the same. Think of it like dividing the same pizza into more slices the total pizza size doesn't change.
 

Types of Stock Splits:

There are different types of stock splits, each with its own twist:

Forward Split 

The most common type, where a company increases the number of outstanding shares. Like our 2-for-1 example above.

Reverse Split

The opposite of a forward split, where the company reduces the number of outstanding shares. This is usually done to increase the share price, which might have become too low, making it difficult to trade.

How can a Stock Split Benefit You as an Indian Investor?

As a sharp investor, you want to understand how this affects your beloved portfolio:

Potential Increase in Share Price 

Increased liquidity and investor interest can lead to a rise in the stock price after the split. This can be good news for your returns.

Easier Entry and Exit 

Smaller share prices might make it easier for you to buy or sell the stock if you wish to adjust your portfolio.

Psychological Boost 

Seeing more shares in your portfolio can feel good, even if the total value remains the same. This can motivate you to stay invested and watch your wealth grow over time.

Stock Split Caution 

Stock splits don't magically make a company's financials stronger. Always analyse the company's overall performance, future prospects, and other factors before making any investment decisions based solely on a stock split. Remember, consult a financial advisor for personalised guidance if you're unsure.

Finding the Best Share Broker for Your Stock Split Journey

With an abundance of brokers, it’s hard to identify the best share brokers in India to make your stock split journey smooth, so prior to selecting your broker follow these basic tips:

Consider your needs and experience

Look for a broker with user-friendly platforms, educational resources, and reliable customer support, suitable for your investment level.

Compare fees and charges 

Don't get caught off guard by hidden fees, Choose a low brokerage stock broker with transparent and competitive pricing structures.

Research their reputation 

Check online reviews and ratings to get a sense of the broker's reliability and customer satisfaction.

Remember, a good broker can be your trusted guide in navigating the Indian stock market, including split tacular situations.

Conclusion

Understanding stock splits can be an empowering tool for Indian investors. While they don't automatically guarantee riches, they can increase liquidity, attract new investors, and can potentially boost the stock price. By deciphering this financial jargon, you can make informed decisions and navigate the Indian stock market with confidence. Remember, investing is a marathon, not a sprint. Focus on understanding the fundamentals, do your research, and choose the right "best share broker" to support your journey.So, next time you hear about a stock split, don't get intimidated. 

Frequently Asked Questions:

Q: What happens to my dividends after a stock split?
Ans: Your total dividend payout will remain the same after a stock split. However, the dividend per share will decrease proportionally to the split ratio. For example, in a 2-for-1 split, your dividend per share will be half of what it was before.

Q: Do I need to do anything after a stock split?
Ans: No, you don't need to take any action. Your existing shares will automatically be split into the new shares by your broker. You'll see the updated number of shares in your account after the split date.

Q: Can a stock split be a bad thing?
Ans: While stock splits can be positive, they don't automatically guarantee success. Some investors might worry about short-term volatility after a split. Remember, always focus on the company's overall performance and future prospects before making any investment decisions.

Q: What are some examples of Indian companies that have undergone stock splits?
Ans: Many prominent Indian companies like Infosys, Tata Motors, and Bajaj Auto have implemented stock splits in the past. These splits have aimed to improve liquidity and attract retail investors.