What Is Share Split Definition and Why Does It Matter

A share split is when a company divides its existing shares into a larger number of new shares, usually to make each share more affordable and attractive to investors. This can be done to boost investor confidence and increase trading activity.

The main goal of a share split is to reduce the share price to a more manageable level, making it easier for small investors to buy and own shares. For example, if a company's shares are trading at $100 each, a 2-for-1 share split would create two new shares for every one existing share, effectively reducing the price to $50.

Share splits can have a positive impact on a company's stock price and trading volume. In fact, studies have shown that share splits can lead to an increase in trading activity and a higher stock price in the short term.

A share split is a way for companies to divide their existing shares into more shares, making each share worth less. This can make the stock seem more affordable to small investors.

For example, if a stock was priced at Rs. 3,000 before the split, after a 5-for-1 split, the price drops to Rs. 600. This makes the share seem more affordable to small investors.

Research has shown that stock splits often result in short-term abnormal returns, with companies experiencing an average 2% to 4% increase in value around the split announcement. This phenomenon, known as the "announcement premium", has been studied by financial researchers for decades.

There are several overlapping explanations for this phenomenon, including the idea that companies split their stock to keep the share price within a perceived best range. This range balances the needs of different investor types, making it more appealing to investors.

Here are some reasons why companies might choose to split their shares:

Stock splits can affect option contracts, so it's essential to review how your contracts are affected if you're holding options during a split.

Companies issue shares for various reasons, but one key goal is to make their stock more accessible to a broader investor base. A lower share price can be a major draw for smaller investors.

Some companies see a stock split as a way to make their shares more affordable, especially for retail investors. A lower post-split price can make the stock more attractive to a wider range of investors.

Research has shown that stock splits can result in short-term abnormal returns, with companies experiencing an average 2% to 4% increase in value around the split announcement. This phenomenon is known as the "announcement premium."

Companies may also split their stock to keep the share price within a perceived best range that balances the needs of different investor types. This can include avoiding prices that might appear strange or outlandish to investors.

A stock split can also be a strategic move to enhance the company's image. A lower share price can create a perception of affordability and growth potential, attracting new investors.

Here are some possible reasons why companies issue shares:

For example, Amazon's 20-for-1 stock split in 2022 made the stock price more affordable, with a single share costing around $139 after the split. This increased accessibility can lead to higher trading volumes and improved liquidity.

As an existing shareholder, you might not notice any changes after a stock split, but it can make your portfolio management easier and offer more liquidity, along with more shares.

The number of shares you own doesn't change, just the price of each share. For example, if Apollo Hospital's share price was Rs. 5,000 pre-split and split 5:1, you'd now own 5 times as many shares, each priced at Rs. 1,000.

If you're a prospective shareholder, a stock split can make it more affordable to buy shares in the company. A lower share price can attract new investors who found the pre-split price too high.

The reduced share price can increase demand, which can lead to a higher stock price. This is because a broader investor base is attracted to the lower price, making the stock more appealing.

In the case of Apollo Hospital, a share price of Rs. 5,000 before the split would become Rs. 1,000 after a 5:1 split. This makes it more accessible to new investors who can now buy shares at a lower price.

A share split is a way to adjust the number of shares a company has outstanding, making it more accessible to investors. The total number of shares increases proportionally, while the share price decreases correspondingly.

For example, in a 2-for-1 split, each shareholder receives two new shares for every one share held previously. This means the investor's ownership percentage remains the same, but they now have more shares to trade.

The total investment value remains unchanged, as seen in the example of an investor owning 100 shares of Company XYZ at ₹800 per share, resulting in a total investment value of Rs. 80,000. Following a 2-for-1 stock split, the investor would hold 200 shares at ₹400 per share, with the total investment value staying at Rs. 80,000.

A share split increases the number of shares proportionally, while the share price decreases correspondingly. This means that if a company declares a 2-for-1 split, each shareholder receives two new shares for every one share held previously.

The total investment value remains unchanged, as seen in the example where an investor owns 100 shares of Company XYZ at ₹800 per share, with a total investment value of Rs. 80,000. Following a 2-for-1 split, the investor would hold 200 shares at ₹400 per share, with the total investment value staying at Rs. 80,000.

A share split does not inherently create additional value for shareholders. The underlying fundamentals of the company remain unaffected.

The primary benefits of a stock split are often psychological and related to improving market liquidity and accessibility.

Stock splits can have a significant impact on futures and options contracts, so it's essential to understand how they're adjusted. The adjustment factor is calculated based on the stock split ratio, and it's used to determine the revised futures/strike price and market lot.

For example, if a company like TATA Steel undergoes a 10:1 stock split, the adjustment factor would be 10. This factor is then used to calculate the revised futures/strike price by dividing the old price by 10, and the revised market lot by multiplying the old lot by 10.

The revised details of a futures or options contract after a stock split adjustment are as follows:

As you can see, the investment or contract value of a futures or options contract remains unchanged after adjustment for a stock split.

A share split, also known as a stock split, can have both positive and negative effects on investors and companies.

Increased liquidity is one of the main advantages of a share split. This means that the stock becomes easier to trade, and the bid-ask spread narrows, making it simpler for buyers and sellers to conduct transactions.

A higher number of shares outstanding can result in greater liquidity for the stock, facilitating trading and potentially narrowing the bid-ask spread.

The higher number of shares outstanding can also make it easier for companies to repurchase their shares at a lower cost.

While a split, in theory, should have no effect on a stock's price, it often results in renewed investor interest, which can positively affect the stock price.

Some investors view a stock split as a bullish signal, indicating executive-level confidence in the company's prospects for future growth.

However, there are also some potential downsides to consider. For example, a stock split can result in increased costs for the company, such as the costs of doing the split and the potential for market reaction.

The costs of doing the split can include the expenses of printing new stock certificates, updating records, and notifying investors.

A stock split can also lead to potential increased volatility in the stock price, which can be a disadvantage for some investors.

Here are some of the key advantages and disadvantages of a share split:

Stock splits can be a positive signal for investors, as they often indicate a company's growth or future growth prospects. A broader investor base can heighten demand, increasing the stock price.

The change in stock price after a split is cosmetic, it doesn't change a company's underlying value or an investor's percentage ownership. Historically, bullish outcomes tend to follow stock split events, often in the form of higher earnings expectations and sometimes earnings growth.

For current holders, a stock split means they'll hold more shares of a company, but the value doesn't change. The strength of a company's stock comes from its earnings, not the price of its stock.

Stock splits can be good for investors because they make a stock's price more affordable, allowing some investors who were priced out before to buy the stock now.

A stock split can increase demand for the stock, which can lead to higher prices. Historically, bullish outcomes tend to follow stock split events, often in the form of higher earnings expectations and sometimes earnings growth.

For current holders, a stock split doesn't change the value of their shares, but they do get to hold more shares of the company. The strength of a company's stock comes from its earnings, not the price of its stock.

A stock split can also make it easier for young investors to diversify their portfolios. For example, if a single share of Amazon stock costs $139, it would represent only 3% of a $5,000 portfolio, making it easier to spread out investments.

Warren Buffett, Berkshire Hathaway, and stock splits are a fascinating topic. Berkshire Hathaway, a holding company for Warren Buffett and his team, has a single share trading for about $500,000 as of May 2023.

Warren Buffett doesn't believe in splitting Berkshire's shares, he thinks the stock should "parallel" the value the company has accumulated over time. This is a deliberate decision to maintain the stock's high value.

Berkshire Hathaway does list a separate class of shares, called B-shares, which trade at about $325 per share as of May 2023. The B-shares are splittable and did a 50:1 split back in 2010.

The A-shares, which are not splittable, hold much more voting power than the B-shares.

A stock split can have a significant financial impact on a company.

The price per share can decrease immediately after the split, but it can also increase over time due to increased demand from small investors who perceive the stock as more affordable.

The market capitalization of the company remains largely unchanged after a stock split, as seen in Apple's case where it remained $556 billion despite the split.

However, if perceived positively, a stock split can attract more investors, resulting in increased share prices over time, which can lead to an increase in the company's market capitalization.

Receiving more shares after a stock split won't trigger a tax bill. You won't have to pay taxes on the additional shares, as U.S. law doesn't consider them taxable income.

The tax basis of each share will be halved after a stock split, so if you owned 10 shares worth $100 each before the split, your shares will be worth $50 each after the split.

A stock split is a significant corporate event, but it's essential to understand that it doesn't change the fundamental value of the company.

The total market value, earnings, and financial health of the company remain the same before and after the split, as mentioned in Example 4. This is a crucial point to note, as some investors might assume that a stock split automatically increases the company's value.

The share price of Apple Inc. was around $649.88 before the seven-for-one stock split in June 2014, and after the split, it dropped to $92.70 per share. However, the market capitalization of the company remained largely unchanged at $556 billion, showing that the stock split didn't alter the company's fundamental value.

This means that the value of the company hasn't changed, even though the number of outstanding shares increased from 861 million to 6 billion shares after the split.

Apple's stock split in 2020 is a great example of how a company can make its shares more affordable for investors. The company split its shares four-for-one, making each share trade at around $135.

An investor who owned 1,000 shares of Apple pre-split would have owned 4,000 shares post-split. This is because each share was subdivided into four smaller shares.

Apple's outstanding shares increased to over 15 billion after the split. This is a significant increase, but the market capitalization continued to fluctuate, rising to over $3 trillion in September 2024.

A company may split its stock as many times as it would like, as Apple did in 2014, 2005, 2000, and 1987. These splits can be used to make the stock more attractive to investors.

For instance, a single pre-split Apple share in 1987 would have eventually been split into 224 shares after the 2020 split. This is determined by multiplying the ratio value of each split together.

XYZ Limited's 1:10 stock split is another example of how a company can make its shares more affordable for investors. Each existing share was subdivided into ten shares with a face value of Rs. 1.

The record date for this split was set for January 10, 2024, and the share price adjusted to around Rs. 2,500 after the split. This made the stock more attractive to investors who wanted to buy smaller portions of the company.

ABC Limited's 1:5 stock split is another example of how a company can make its shares more affordable for investors. Each existing share was subdivided into five shares with a face value of Rs. 2 each.

The record date for this split was set for May 20, 2024, and the share price adjusted to around Rs. 100 per share after the split. This made the stock more attractive to investors who wanted to buy smaller portions of the company.

The goal of a stock split is to make the stock more affordable for investors, as seen in the examples of Apple, XYZ Limited, and ABC Limited. By subdividing shares, companies can increase liquidity in the market and make their stock more attractive to investors.