Have you ever wondered why suddenly you see some companies’ stock prices drop without anything changing with their business? That’s often because of a stock split. A stock split is when a company divides its existing shares into more units, making each share cheaper. Think of it as slicing a pizza into more pieces; you get more slices, but the total pizza size stays the same.

Companies do this to make shares more affordable and inviting for more investors, especially when the original price becomes too high for most to buy a single stock. In this guide, let’s break down how a stock split works, why companies do it, and what it actually means for everyday investors like you. 

What Exactly is a Stock Split?

A stock split is a corporate action where a company increases the number of its outstanding shares by giving existing shareholders more shares based on a specific ratio. For instance, in a 2-for-1 stock split, an investor holding one share will now have two, and each share’s price is reduced to half, so the total investment value is unchanged. 

The most common ratios of a stock split are 2-for-1, 3-for-1, or even 10-for-1 in some cases, like Nvidia’s huge ten-fold split in 2024 to make shares more accessible. The process is automatic as the shares are credited by the company, and stock prices adjust on exchanges like NSE and BSE.

Let’s help you understand this with a simple example. If you hold 50 shares of a company at ₹400 each, your total investment is ₹20,000. After a 2:1 split, you’ll have 100 shares, now trading at ₹200 each, but notice, your total value remains ₹20,000. So, a stock split does not make you richer; your share of the company stays the same.

Why Do Companies Split Their Stock?

In this section, let’s understand the reasons why companies choose to split their stocks:

To Make Shares More Accessible

When share prices soar, fewer people can afford to buy even one share of a company. For example, in 2023, HAL split its stock 2-for-1, making each share much more affordable for employees and new investors. This move by companies helps retail investors jump in and feel included.

Boosting Liquidity

By making shares cheaper, trading activity rises as more people buy and sell, making it easier to get in and out of investments. Indian stocks like those listed on NSE and BSE often see increased trading volumes after a split.

Attracting a Wider Investor Base

Lower-priced shares appeal to new investors, including those just starting their investment journey. This can increase the company’s visibility and popularity among small investors.

Maintaining Psychological Price Levels

Some investors might get scared off by a four-digit stock price, even if they can buy partial shares. A split brings prices down to more “normal” levels, supporting demand.

What Actually Changes in a Stock Split?

  • Shares in Your Demat: If a stock split is announced, the new shares just appear in your demat account automatically, without any action needed from your end.
  • Share Price Adjustment: Once the split takes effect, the price of each stock is adjusted. A 2-for-1 split halves the price; a 3-for-1 split reduces it to one-third, and so on.
  • Market Capitalisation Stays the Same: Company value, or market capitalisation, is calculated by multiplying the share price with the total shares. Even after a split, the total value stays unchanged, both for the company and for stockholders.
  • Ownership isn’t Diluted: Your stake percentage remains the same. If you held 2% of a company’s shares pre-split, you’ll still own 2% post-split, just in more units.

Types of Stock Splits

There are two main types of stock splits: 

Forward Stock Split

This is the most common kind of stock split. Here, the company splits one share into multiple, making the stock more affordable. E.g., a 2-for-1, 3-for-1 or even 10-for-1 split.

Reverse Stock Split

Rare, but sometimes done to boost a sagging share price. Here, multiple cheaper shares are consolidated into fewer, more expensive ones; say, 10 shares become 1.

Advantages of a Stock Split

  • Improved Liquidity: More shares mean it’s easier to buy and sell, reducing price swings in normal trading.
  • Wider Accessibility: Lower prices attract new investors, increasing the potential number of shareholders.
  • Sign of Company Strength: Many view a split as management’s confidence in future growth, as it usually happens when a company’s shares are already in demand.
  • Perceived Affordability: Investors psychologically find a ₹500 stock less intimidating than one at ₹5,000.

Disadvantages and Risks

  • No Change in Real Value: A split doesn’t increase the actual worth of the company or your investment, just splits it into smaller pieces.
  • Temporary Price Volatility: There may be short-term jumps in price due to excitement, but prices usually stabilise.
  • Potentially Misleading Signal: In rare cases, a split could be seen as covering up a lack of company growth or other issues, although this is much less common.
  • Higher Trading Volumes May Increase Volatility: More trades can sometimes make short-term prices swing more.

How Does a Stock Split Affect Investors?

Now, let’s understand how a stock split might affect you: 

For Existing Shareholders

  • Your shares increase, but investment value stays unchanged.
  • Liquidity improves; easier to buy or sell part of your holding.

For New Investors

  • Now, you will be able to afford and buy what were once high-priced shares.
  • May feel encouraged by the company’s reputation for investor friendliness.

For Day Traders

  • Volatility may spike just after a split, offering quick trading opportunities, though these are risky.

How to Keep Track of Stock Splits in India

Indian stock exchanges like NSE and BSE regularly update investors about upcoming and recent stock splits. You should always double-check with your stockbroker so you don’t miss out on new shares.

Things to Remember As an Investor

  • Stock splits are corporate moves; don’t rush to buy just because a split is announced.
  • Always focus on company fundamentals: revenue, profits, and assets, not just the share price.
  • Use splits as an occasion to review if the company still matches your investment goals.

Conclusion

The main goal of a stock split is to make investing more accessible. If you are investing for the first time, a split can be a friendly entry point, but it doesn’t change a company’s real value. Whether to buy or sell after a split should rely on company performance, not just the lower share price. So, the next time a company announces a stock split, you will know what to do. Happy investing! 

FAQs

1. What Happens to My Shares When a Company Announces a Stock Split?

Your total number of shares increases according to the split ratio, but the overall value of your investment stays the same. The price per share drops, but your ownership doesn’t change.

2. Does a Stock Split Make a Stock Cheaper or More Valuable?

A split makes each share cheaper, so more people can afford to buy, but it doesn’t affect the total value of your holdings or the company’s value.

3. Will a Stock Split Guarantee Higher Returns?

A stock split doesn’t assure higher returns. Any gains depend on the company’s real performance, not just the split.

4. How Do I Know If a Stock Split Is Coming Up?

Stock splits are announced on company websites, stock exchange bulletins, and news outlets in India.

5. Is There Any Tax Impact If I Receive Extra Shares in a Split?

No, stock splits do not have any direct tax implications at the time of the split in India. Capital gains tax applies only when you sell your shares.