Upcoming Share Split: A Guide to Understanding Stock Splits

A share split is a way for companies to increase the number of their outstanding shares by dividing existing shares into smaller units. This means that the total number of shares increases, but the value of each share decreases.

The main reason companies do share splits is to make their stock more attractive to investors, particularly those who are interested in buying smaller amounts of stock. This can make the stock more appealing to a wider range of investors.

A share split doesn't change the company's value or its overall financial situation. It's simply a way to adjust the number of shares outstanding.

A stock split is a way for companies to make their shares more affordable for investors. Existing shareholders receive additional shares when a company issues them, increasing their total shares by a specified split ratio.

Companies choose to split their stocks to lower their share trading prices, making it more appealing to investors. Meghan Railey, a certified financial planner, recalls stock splits as 'when a company wants to change their per-share prices while making the stocks more accessible to people.'

The board of directors can choose any split ratio, such as 2:1, 3:1, 5:1, 10:1, or 100:1. A 3-for-1 split represents that for every share you hold in a company after the split, you'll own three.

Investors often prefer to buy 100 shares of a stock rather than one share at a high price. Companies introduce stock splits when their share prices rise, making it more accessible to investors.

The new share price is determined by dividing the original price by the split ratio. For example, a 3-for-1 split would lower the price from Rs. 1000 to Rs. 333.

Companies do share splits for a variety of reasons, and it's not always a straightforward decision. Management might decide to do a forward stock split if they believe the price is relatively "high" or that it's trading outside of an "optimal" range.

A stock split can make a company's shares more accessible to a wider range of investors. For example, Amazon Inc. carried out a famous stock split at a 20:1 ratio in June 2022, making shares more affordable for investors.

A company may initiate a reverse stock split if they believe the stock price is relatively "low" or to avoid being delisted. This was the case with Apple, which has split its stock four times when its shares have seen significant price increases.

Apple's stock has appreciated enormously since the company's last split, becoming the first publicly listed business to be valued at over $1 trillion in December 2019. A stock split might not directly increase share prices, but it can often result in higher share prices further down the line.

Here are some reasons why companies do share splits:

A stock split can have a significant impact on investors, but it's essential to understand what exactly happens. The number of shares held by an investor changes, but the total value of their investment remains the same.

This means that an investor's ownership percentage in the company remains the same, but the number of shares they hold and the price per share change. For example, if an investor owns 1,000 shares of common stock at Rs. 100 per share, a 2-1 forward stock split would result in 2,000 shares at Rs. 50 per share, with the same total value of Rs. 1,00,000.

A stock split can temporarily impact a company's share price, making it more affordable to investors and increasing demand. However, a stock split does not change the value of a stock, as it does not change the fundamentals or growth prospects of the underlying company.

In fact, a stock split is often a good sign that the company is growing and is open to future growth prospects. However, it's essential to remember that a stock split itself does not impact your holdings' value. A stock split announcement can sometimes lead to a temporary increase in the stock price, but this is not a guarantee and should not be the sole reason for buying or selling a stock.

Here are some key points to keep in mind:

Ultimately, a stock split is a neutral event that should not be the sole reason for buying or selling a stock. It's essential to consider other factors, such as the company's fundamentals, growth prospects, and overall market conditions, before making any investment decisions.

There are two main types of stock splits that companies can use to increase the number of outstanding shares.

A 2-for-1 split is one common type, where the number of shares is halved and the share price is doubled. For example, if a company had 10,000 shares at a price of 50 rupees each, after a 2-for-1 split, the number of shares would be 20,000 and the share price would be 25 rupees each.

This type of split is often used to make the stock more affordable for investors. The total market capitalization of the company remains the same, as can be seen in the example where the total market cap is still 5,00,000 rupees.

Let's look at the numbers in a table to see how a 2-for-1 split affects the number of shares, share price, and total market cap:

The numbers are clear: the total market cap remains the same, but the number of shares is doubled and the share price is halved.

As we explore the concept of share splits, it's helpful to look at a real-life example. A company named Company X had an original share price of Rs. 1,400 and a split ratio of 2:1.

The investor in Company X owned 10 shares at Rs. 1,400 each, making their total investment Rs. 14,000. After the split, they received 2 additional shares for each existing share, resulting in a total of 20 shares.

The share price was adjusted to Rs. 700 per share, but the investor's total investment remained the same at Rs. 14,000. This example shows how a share split can affect an investor's holdings without changing their overall investment value.

Let's take a closer look at what a stock split is and how it affects investors. A stock split is a way for companies to increase the number of shares outstanding, making each share more affordable for investors.

The process of a stock split is quite simple. For example, if a company has a two-for-one split, an investor will receive two new shares for each existing share they own.

This means if an investor owns 10 shares before the split, they'll end up with 20 shares after the split. The share price is adjusted to reflect the split ratio, becoming half of its original value. For instance, if the original share price is Rs. 1,400, it will be adjusted to Rs. 700 per share after a two-for-one split.

Here's a comparison of the investor's situation before and after the split:

As you can see, the investor's total investment remains the same, but they now have more shares at a lower price. This can make the stock more attractive to new investors and increase trading activity.

Apple's second stock split took place on 21 June 2000, and it was a two-for-one split. This means that for every one share you owned, you received one additional share.

The stock price before the split was $111 on 31 May 2000. After the split, the number of shares increased, but the value of each share decreased.

Ahead of the split, the stock price was $111, but shortly afterwards, in September 2000, share prices were halved due to the dot-com bubble burst. Apple blamed lower-than-forecast sales and weaknesses in the education market.

Apple's shares made a full recovery and went on to achieve new highs. This split was also a two-for-one ratio, similar to the first split in 1987.

Here's a summary of Apple's stock splits: