A Stock Split Can Change the Number of Shares You Hold, But What Changes for Investors?
A stock split is a business move that causes a proportional decrease in the face value and price of the stock and is accompanied by a proportional increase in the number of shares held by an investor. The value of the investor’s portfolio will not change immediately following the split, but the split could impact the ease in which investing occurs, the makeup of the investor’s portfolio, and the future investment choices made by the investor. A stock split can be explained by investors to show how the change in stock splits affects the number of shares held in the portfolio, but not the value of the investment.
What Is A Stock Split?
A stock split is a company’s decision to issue many more shares of its stock than it already has, by dividing its current shares into smaller increments in accordance with a fixed ratio. The split will not add any value to shareholders. Rather, the number of shares issued is reduced and the share price is lowered accordingly.
For instance, a 1:2 stock split would mean that a share is split into two shares. The share price might be adjusted to theoretically the price be ₹500 per share from the original share price of ₹1,000 with market movements and applicable adjustments.
If an investor had 10 shares prior to the split, they will have 20 shares after the split. The overall loss or gain after the adjustment is about the same (ignoring market fluctuations and transaction related factors).
Why Do Companies Announce Stock Splits?
Companies may consider stock splits for several reasons, depending on their capital structure and market circumstances.
Improving Share Accessibility
A high market price per share may make individual shares less accessible to some investors. A stock split reduces the price per share, potentially allowing investors to purchase shares in smaller monetary amounts.
Increasing Trading Participation
Companies may use stock splits as part of their approach to improving share accessibility and supporting trading participation. A lower share price may make it easier for investors to transact in smaller quantities.
Aligning With Capital Structure
A stock split changes the number of outstanding shares and their face value. Companies may undertake this adjustment as part of their capital management decisions.
How Does A Stock Split Affect Your Holdings?
The primary effect of a stock split is a change in the number of shares an investor owns when they open Demat account.
Consider the following example:
| Particulars | Before Split | After 1:2 Split |
| Number of shares | 20 | 40 |
| Price per share | ₹800 | ₹400 |
| Total holding value | ₹16,000 | ₹16,000 |
This example assumes that the market price adjusts proportionately and that there are no other price movements.
After the split, the share price may change based on market demand, company performance and broader market conditions. Therefore, the value of the investment can increase or decrease following the adjustment.
Does A Stock Split Increase Your Investment Value?
A stock split does not automatically increase the value of an investor’s holding. The adjustment changes the number of shares and price per share, but the overall value generally remains unchanged at the point of the split.
For example, an investor holding shares worth ₹25,000 before a split would generally continue to hold shares worth approximately ₹25,000 immediately after the adjustment.
However, the stock price may move after the split. If the company reports strong financial results or market sentiment changes, its share price may rise. Conversely, unfavourable developments may cause the price to decline.
Stock Split Vs Bonus Shares
Stock splits and bonus shares are different corporate actions, although both can increase the number of shares held by investors.
In a stock split, existing shares are divided according to a specified ratio, and the face value per share is reduced proportionately.
In a bonus issue, a company issues additional shares to eligible shareholders from available reserves, subject to applicable regulations and corporate approvals. The face value of existing shares generally remains unchanged in a standard bonus issue.
Both actions can affect the number of shares held, but their mechanisms and accounting treatment differ.
What Should Investors Check After A Stock Split?
Investors should ensure that their accounts show the adjusted share count post the corporate action.
They should also review changes in average price and the number of transactions and any tax information related to the property. The recognition of acquisition costs and tax treatment will depend on the applicable rules and the type of transaction.
Conclusion
Stock splits affect the number of shares a shareholder owns but they do not impact the share price. The value of the investment, in most cases, will stay the same, but the action may impact share availability and the way investors track their investments. Split ratio, record date and post split adjustments are important to consider when researching corporate actions. Some platforms like 5paisa can assist investors in monitoring their investments, obtaining market data and analytics, and making investment decisions in light of their investment goals and risk tolerance.
