Stock split

Indian Economy glossary

Also called: Share split · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT

Meaning

A stock split divides each existing share into several new shares, each with a lower face value. The number of shares goes up, and the price of each share falls in the same proportion. The total value of the company, and of each shareholder's holding, stays the same. Companies split their shares to make each share cheaper, so that more small investors can buy them and the shares are traded more often (better liquidity).

Example

A share has a face value of Rs 10 and trades at Rs 1,000. The company splits it 1:5, so each share becomes five shares of face value Rs 2. The price falls to about Rs 200. An investor who held 100 shares worth Rs 1,00,000 now holds 500 shares, still worth about Rs 1,00,000.

Don't confuse with

  • Bonus issue: this also increases the number of shares without raising new money. But it converts the company's reserves into share capital, and the face value of each share stays the same. A split lowers the face value and leaves reserves untouched.

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