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What Is Stock Split?

Post Date : April 25, 2022

A stock split is one of the ways of increasing retail participation and is a quite common phenomenon in the stock market. A stock split is a firm’s process of dividing the existing shares into multiple shares to increase the number of outstanding shares held by a company.

An illustration will make things clear:

Split Ratio

Old FV

No of the shares held before split

Share Price before split

Investment Value before split

New FV

No. of shares held after split

Share Price after the split

Investment value after the split

1:1

10

100

600

60000

5.0

200

300.0

60000

1:5

10

100

600

60000

2.0

500

120.0

60000

1:10

10

100

600

60000

1.0

1,000

60.0

60000

 

In case of a stock split, the number of shares held by the shareholder increases however the investment value remains unchanged just like a bonus issue.

The face value reduces in case of a stock split.

For instance,

If the face value (FV) of a stock is Rs.10., and a stock split in a 1:1 ratio is announced. The FV here will split in half. Similarly, if the split ratio is 1:5 then the FV will be Rs.2 (10/5 in the above example).

Since the market value of shares remains unchanged, the price per share has to reduce in the same proportion as the face value and the number of shares has to increase inversely. This means a stock split of 1:1 will reduce the share price by half and the number of shares outstanding will double. Similarly, the number of shares in the above split ratio of 1:5 will increase 5 times and the new number of shares will be 500.

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