# Stock split: Is it good for me?

It is likely that you may have stopped yourself from buying a company’s shares due to the price being too high. Turns out that some companies don’t want to turn away public participation due to this, so they may decide to do a stock split.  In this article, we will throw some light on what stock splits are and whether they are good for you.

## Before everything else, let’s formally define the term stock split.

A stock split is a corporate action through which a company divides its existing shares into multiple shares. All that means is that the stock you presently hold splits and multiplies in number.

This is similar to when you exchange one of your Rs.2000 notes for 10 notes of Rs.200. All that is changing is the number of notes you have; it does not impact the inherent value of your notes.

Companies announce a stock split in some ratio. If a company announces the stock split in the ratio of 10:1, it would translate to every 1 share you hold becoming 10 shares.

As an example, if you held 100 shares in a company and it announces a split in a 10:1 ratio, then your 100 shares become 1000 shares as a result of this split.

The face value of the stock gets split in the same ratio as well. So, if the face value before the split was Rs.10, it become Rs.1 after the split due to the 10:1 ratio.

## Let’s understand the impact a stock split has on the stock price and the market capitalization of a company through a simple example.

Assume that there exists a company which has 10 lakh shares outstanding in the market with the price per share being Rs. 100. Therefore the market capitalization of the company is 10 lakh shares multiplied by Rs.100, which is Rs. 10 crores.

Assume that you own 100 shares of this company with the price per share being Rs.100, so the net-worth of your portfolio is Rs.10,000.

Now this company announces a stock split with the split ratio being 2:1.

Due to the split, you now own 200 shares with the price of each share reducing to Rs.50. Notice that the net-worth of your portfolio remains the same as before, Rs.10,000.

The split has also doubled the number of shares outstanding in the market to 20 lakhs with a proportionate reduction in the price per share to Rs.50. If we were to calculate the market capitalization, it would be 20 lakh shares multiplied by Rs.50, which is Rs. 10 crores, which is also the same as before.

All in all, a stock split results in an increase in the number of shares and proportionately reduces the price per share, without impacting either the market capitalization of the company or the net-worth of your portfolio.

## Now let’s understand why a company would do a stock split and how this would impact you as an investor.

As we discussed in the beginning, many a times smaller investors stop themselves from buying the shares of a company because the price is too high.

To counter this, a company may announce a stock split which results in a reduction of the price per share thereby making it more affordable to buy. This in turn helps the company in expanding its shareholder base.

This results in an increase in liquidity of the shares because after the split there are more outstanding shares in the market, which translates to a potential increase in the trading volume and market activity.

All of these factors result in an increase in the demand for the stock, which then potentially ends up increasing the stock price after the split. If this were to happen, then the net-worth of your portfolio would increase as well.

On the other hand, it is also possible for a company to never announce a stock split to create a premium space for themselves and their shareholders. One of the most prominent examples of this would be MRF Ltd which has never announced a stock split. Its stock used to trade around Rs.500 in 2000-2001 and presently, it trades at around Rs.82,000.

To conclude, it can be said that the decision to do a stock split and subsequently increase the liquidity of the stock lies entirely in the hands of the company.

So, let’s summarize everything we have covered:

• In a stock split, the stock which you presently hold splits and multiplies according to some ratio announced by the company.
• In a stock split, the number of shares increase alongside a proportionate reduction in the stock price.
• Stock splits have no impact on either the market capitalization of the company or the net-worth of your portfolio
• The primary reason behind doing a stock split is to increase the liquidity of the shares and make them more affordable to smaller investors.

Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The securities quoted are exemplary and are not recommendatory. The contents herein mentioned are solely for informational and educational purpose.

### Most Popular

• 13 May 2022
• ICICI Securities

#### The Five-Point Financial Planning Checklist For Your Family

Whether you just got married or planning to have a baby or have dependents, you should have financial plans for every stage in your life to ensure a secured future for your family members. Here are five things you can do financially for your family.

• 12 May 2022
• ICICI Securities

#### What is a Zero Coupon Bond?

You get fixed returns in the form of interest until maturity when you invest in a bond. Zero-coupon bonds work a little differently. In this article, find out what zero-coupon bonds are, their advantages and whether you should invest in them.

• 12 May 2022
• ICICI Securities

#### What are Cross Currency Pairs?

The forex market is the largest financial market globally. Currency trading is a lucrative and booming business. While most currencies trading happens in relation to the US Dollar, some don’t. That forms the basis of cross currency pairs. Here’s what you need to know about it.

• 12 May 2022
• ICICI Securities

#### George Soros: The man who broke the Bank of England

• 12 May 2022
• ICICI Securities

#### Investing principles from Benjamin Graham: The Father of Value Investing

Benjamin Graham was a British born economist, professor, and investor who taught at Columbia University. He was also a mentor to some of the most famous investors of the 20th century, including Irving Khan, John Templeton, & Warren Buffett. Buffett called him "the second most influential figure in his life, only after my father".

• 12 May 2022
• ICICI Securities

#### How to Invest in Nifty 50?

The Nifty 50 is the benchmark index of the National Stock Exchange. It represents the 50 largest companies listed in India. Investing in the Nifty 50 can be a good idea for those looking to make index-linked returns. Here’s how you can invest in the index.

• 12 May 2022
• ICICI Securities

#### Investment philosophy of Cathie Wood: The most powerful woman on Wall Street

Catherine Duddy Wood, also called Cathie Wood, is an investor who primarily invests in disruptive technologies and is the founder, chief executive officer, and chief investment officer of ARK Investment Management, LLC, an investment management firm mostly active in the United States.

• 11 May 2022
• ICICI Securities

#### How to Use Technology to Improve Your Finances

Technology has made life simpler for everyone. In the realm of personal finance, technology has streamlined many processes—from budgeting to automating your payments. On National Technology Day, let’s look at how technology has transformed our finances.

• 11 May 2022
• ICICI Securities

#### How to Invest in your Every Goal with Mutual Funds?

Each of us is unique. We have different needs and goals in life. Some of us can ride along swinging markets, while some may need a relatively conservative investment tool.

• 11 May 2022
• ICICI Securities

#### Four Reasons Why Entrepreneurs should Invest in Equity Mutual Funds

Equity mutual funds provide growth opportunities not just for individual investors but also for entrepreneurs and corporates. They make excellent investments for anyone looking for wealth creation. This article will give you four reasons why businesspeople should consider investing in equity mutual funds.