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A stock split, also called share split, increases the number of shares outstanding while adjusting the share price proportionally, without changing the company’s overall value.
This comprehensive guide will explore what a stock split is, how it works, and why companies opt for it. You will learn about the different types of share splits, including forward and reverse splits, and how these actions impact investors and the company’s market performance. Additionally, this guide will clarify common misconceptions, present real-life examples from Indian and global markets, and explain regulatory norms governing share splits on Indian exchanges such as BSE and NSE. Whether you are a beginner or someone looking to deepen your understanding of stock market mechanics, this article will equip you with all the necessary knowledge to comprehend share splits fully.
A stock split is a corporate action that increases the number of shares a company has outstanding by issuing more shares to existing shareholders. While the total market value of the company remains unchanged, each shareholder ends up holding more shares, with the price per share adjusted accordingly. Share splits are an important concept in equity markets, often used by companies to improve liquidity and accessibility of their shares to a wider pool of investors.
Share splits come in several forms, primarily classified as forward share splits and reverse share splits. Each type serves a different strategic purpose.
A forward stock split increases the number of shares outstanding by issuing additional shares to existing shareholders. This results in a lower share price, making it more affordable to investors without changing the company’s overall value.
For example, in a 2-for-1 stock split, each shareholder receives two shares for every one share they own, and the stock price is halved.
If a shareholder owns 100 shares priced at ₹200 each, after a 2-for-1 split:
New number of shares = 100 × 2 = 200
New share price = ₹200 ÷ 2 = ₹100
Total value remains = 200 × ₹100 = ₹20,000
A reverse share split reduces the number of shares outstanding by consolidating shares. This increases the share price proportionally and is often used to meet minimum listing requirements or improve the company’s image in the market.
For example, in a 1-for-5 reverse share split, every 5 shares are consolidated into 1 share, increasing the price fivefold.
If a shareholder owns 500 shares priced at ₹10 each, after a 1-for-5 reverse share split:
New number of shares = 500 ÷ 5 = 100
New share price = ₹10 × 5 = ₹50
Total value remains = 100 × ₹50 = ₹5,000
Partial splits are less common and involve issuing a fractional number of new shares. It is important to differentiate stock splits from bonus shares: bonus shares are free additional shares given to shareholders from company reserves and do not affect the share price the same way splits do.
The main feature of a forward stock split is an increase in the number of shares available in the market. For example, in a 2-for-1 stock split, each existing share is split into two, effectively doubling the number of outstanding shares. Similarly, a 3-for-1 split would triple the number of shares held by investors.
Along with this increase in share count, the share price is adjusted downward according to the split ratio. So, if a company’s stock is trading at ₹1,000 and announces a 2-for-1 split, the post-split share price would become ₹500. In the case of a 3-for-1 split, a stock trading at ₹900 would be priced at ₹300 after the split. While the number of shares increases and the price per share drops, the total value of your investment remains unchanged.
Companies split shares for several strategic reasons that revolve around market liquidity, share affordability, and perception:
Improving Liquidity: By increasing the number of shares and lowering the price, stock splits make shares easier to buy and sell, potentially increasing trading volume.
Making Shares More Affordable: High share prices can deter small investors. A split reduces the price, making the stock accessible to a broader base.
Market Perception and Signalling: Stock splits can be perceived as a positive signal indicating confidence in the company’s future growth.
Compliance with Listing Requirements: Some stock exchanges require a minimum price for shares. Companies may split shares to meet these criteria.
Share splits affect investors in several ways, but the key point is that the fundamental value of the investment remains unchanged.
Shareholders receive additional shares proportional to their existing holdings.
The market price adjusts downward (forward split) or upward (reverse split).
Total market value of shares held remains constant.
Dividends per share may adjust, but total dividend income usually remains unchanged.
Voting rights and ownership percentages remain the same.
However, this psychological effect may also contribute to short-term volatility or unrealistic investor expectations, despite no fundamental change in value.
Reverse Stock Splits
A reverse stock split is a corporate action where a company reduces the number of its outstanding shares while increasing the price per share proportionally. Unlike a regular (forward) stock split, which makes shares more affordable, a reverse stock split is often used to boost a company’s share price, especially if it has fallen significantly. For example, in a 1-for-5 reverse split, every 5 existing shares are combined into 1 share, and if the stock was trading at ₹20 before the split, it would trade at ₹100 after. Although the number of shares held by investors decreases, the total value of their investment remains the same. In India, companies may opt for a reverse stock split to meet stock exchange listing requirements or to improve the perception of the stock in the market.
Share splits carry both potential benefits and drawbacks for investors and companies.
Increased liquidity improves ease of buying and selling shares.
Lower prices may attract retail investors.
Can signal management confidence and positive company outlook.
May boost market participation and widen investor base.
No real change in company fundamentals or value.
Can create short-term volatility in stock price.
Additional administrative costs for companies.
Some investors may misinterpret splits as guaranteed growth signals.
This balanced view helps investors make informed assessments about stock splits.
Looking at examples helps solidify understanding.
Infosys Limited: Infosys performed a 1-for-5 stock split in 2022, making shares more affordable to retail investors.
Reliance Industries: Multiple share splits in the past aimed at improving liquidity and market participation.
Global Example - Apple Inc.: Apple’s well-known share splits (such as 4-for-1 in 2020) helped lower the share price and attract more investors.
Disclaimer: The securities quoted are for illustration only and are not recommendatory.
Clarifying myths is key to investor education:
Myth: Stock split increases company value
Fact: The market capitalisation remains the same; only the number of shares and price per share change.
Myth: Share split guarantees profit
Fact: Share splits do not affect the company’s fundamentals or guarantee any returns.
Myth: Reverse stock split is always negative
Fact: While often used to boost stock price, reverse splits can help companies meet exchange requirements or restructure shares.
Stock splits are a common and strategic corporate action that companies use to adjust their share structure without altering their market value. Understanding share splits helps investors navigate the equity market with clarity, avoiding misconceptions and appreciating the impact of such actions on their holdings. While stock splits affect the number of shares and stock price, they do not change the intrinsic value of the investment.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Sources
Securities and Exchange Board of India (SEBI) – https://www.sebi.gov.in
Bombay Stock Exchange (BSE) – https://www.bseindia.com
National Stock Exchange (NSE) – https://www.nseindia.com
Investopedia – https://www.investopedia.com/terms/s/stocksplit.asp
Infosys Investor Relations – https://www.infosys.com/investors/
Reliance Industries Corporate Actions – https://www.ril.com/investors/
You receive additional shares based on the split ratio, and the price per share adjusts accordingly, but the total investment value remains the same.
Dividends per share may be adjusted after a split, but your total dividend income usually remains unchanged.
Splits themselves do not change fundamentals; however, improved liquidity and investor perception may influence price movements.
A reverse split consolidates multiple shares into fewer shares, increasing the share price proportionally.
