Stock Split
What is a Stock Split?
A stock split, also known as a share split, is a corporate action in which a company increases the number of its outstanding shares by issuing more shares to current shareholders while maintaining the same market capitalization. This is done without changing the company's overall value or market capitalization.
How Stock Splits Work?
Stock splits are typically expressed as a ratio, such as 2:1, 3:1, or 5:1. This means that for every share held before the split, each shareholder will receive two, three, or five shares, respectively, after the split. For example, if a company with 100 million shares outstanding declares a 2-for-1 stock split, there will be 200 million shares outstanding after the split. However, the total value of the company will remain the same, as the price of each share will be halved.
Why do Companies Split Stocks?
- To make the share more affordable to investors. A high stock price can make it difficult for smaller investors to buy shares of a company. By splitting the stock, the company can make it more affordable for a wider range of investors to participate in its ownership.
- To increase liquidity. A stock with a high price is less likely to be traded than a stock with a lower price. By splitting the stock, the company can make it more attractive to traders, which can increase liquidity.
- To create a more positive image. A stock split can be seen as a sign of confidence from the company's management. It can also signal that the company is growing and expects its stock price to continue to rise.
Recent Example of Stock Split - Tata Steel Stock Split
Tata Steel, an Indian steel company, announced a 10-for-1 stock split in March 2023. The stock split took effect on April 1, 2023. Before the split, Tata Steel's stock was trading at around ₹1,200 per share. After the split, the stock began trading at around ₹120 per share.
Stock Split vs Bonus Shares
A stock split and a bonus issue are both corporate actions that increase the number of shares outstanding.
In a stock split, the company issues new shares to shareholders in proportion to the number of shares they already own. This means that shareholders' ownership stake in the company remains the same.
In a bonus issue, the company issues new shares to shareholders as a reward for their investment. The number of shares issued to each shareholder typically depends on the size of their investment.
Another key difference is that a stock split does not affect the company's earnings per share (EPS), while a bonus issue does. This is because the number of shares outstanding increases in a bonus issue, but the company's earnings remain the same.
