A stock split is a corporate action in which a company increases its number of outstanding shares while proportionally decreasing the price of each share. This process does not change the company’s overall market value but makes individual shares more affordable.
For instance, in a 2-for-1 split, if you owned one share worth ₹1,000, you would end up with two shares worth ₹500 each after the split.
Companies usually initiate stock splits to improve liquidity and increase accessibility to a wider array of investors. News around upcoming stock splits is typically the focus of market attention because it can indicate the intention of the management/promoters to think hard about small and minority shareholders.
Types of Stock Splits
Stock splits come in various forms, each with its implications for shareholders and the market. Here are the different types of stock splits:
- Forward Split: This is the most common type, where the number of shares increases, and the price decreases proportionally. Examples include 2-for-1, 3-for-1, or even 10-for-1 splits.
- Reverse Split: Less common, this occurs when a company reduces its number of outstanding shares and increases the share price. It is often used by companies trying to meet minimum share price requirements for stock exchange listings.
- Odd-Lot Forward Split: This targets shareholders with less than 100 shares, aiming to bring them up to a round lot of 100 shares.
- Split-Offs: A more complex form where a parent company exchanges its shares for shares in a subsidiary, effectively ‘splitting off’ the subsidiary.
Investors can find information about these different types in the share split list published by stock exchanges or financial news outlets.
How Does a Stock Split Work?
When a company decides to split its stock, the process unfolds as follows:
- Announcement: The company declares its intention to split the stock, specifying the split ratio and the effective date.
- Record Date: This is the date used to determine which shareholders are eligible for the split.
- Ex-Split Date: The date when the stock begins trading at its new, split-adjusted price.
- Distribution: Additional shares are distributed to shareholders’ accounts based on the split ratio.
For example, if you own 100 shares of a company trading at ₹1,000 per share, and the company announces a 2-for-1 split, you will end up with 200 shares valued at ₹500 each after the split. The stock split today might differ from what was announced earlier, so staying updated with the latest information is crucial.
Advantages and Disadvantages of Stock Splits
Stock splits can have various impacts on both companies and investors:
Here are the advantages of stock splits:
- Increased Liquidity: More shares at a lower price can lead to increased trading volume and improved liquidity.
- Broader Investor Base: Lower share prices make stocks more accessible to smaller investors.
- Positive Signal: Splits are often seen as a sign of company confidence and strong performance.
- Psychological Appeal: A lower share price might seem more attractive to some investors, even though the company’s value has not changed.
Here are the disadvantages of stock splits:
- No Fundamental Change: A stock split does nothing to change a company’s underlying value or its financial performance.
- Increased Volatility: The increased accessibility can sometimes result in greater short-term trading and pricing volatility as well.
- Administrative Costs: There are expenses associated with implementing and communicating the split.
- Potential for Speculation: The buzz around splits can sometimes lead to unwanted speculation.
Let’s have a look at the latest stock split examples here:
XYZ Ltd. announced a 2-for-1 stock split with an ex-date of 31st January 2025, reducing the face value from ₹2 to ₹1 per share. Post-split, the share price adjusted accordingly, and trading volumes increased, enhancing liquidity.
ABC Ltd. declared a 5-for-1 stock split with an ex-date of January 28, 2025. The face value decreased from ₹10 to ₹2 per share.
Following the split, the stock price was adjusted proportionally, making shares more affordable and potentially attracting a broader investor base.
Factors To Consider While Analysing Stock Splits
When evaluating the potential impact of a stock split, consider these factors:
- Look beyond the split to assess the company’s financial health, growth prospects, and industry position.
- Determine how the share market is reacting to the split announcement and whether it aligns with overall market trends.
- Check if previous splits (if any) had a significant impact on the stock’s performance.
- Assess whether the split is likely to increase trading volume and liquidity meaningfully.
- Consider how the split might change the mix of institutional versus retail investors.
Conclusion
Stock splits can enhance liquidity and make shares more accessible to investors, but their impact varies based on market conditions and company fundamentals. While today’s split share list might include numerous companies, each case should be analysed individually. This also considers financial performance, growth potential, and post-split market behaviour before making investment decisions.
