A stock split is a common method used to increase retail participation in the stock market. In this process, the face value of a stock is divided into smaller denominations, which proportionally reduces the market price of the stock.
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 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 |
Due to a stock split, the number of shares held by the shareholder increases, but the total investment value remains unchanged, similar to a bonus issue. However, the face value of the stock is reduced. For example, if the face value of a stock is ₹10 and a 1:1 stock split is announced, the face value will be halved to ₹5.
Since the total market value of the shares remains unchanged, the price per share will decrease in the same proportion as the face value, while the number of shares will increase inversely. For instance, a 1:1 stock split will reduce the share price by half and double the number of shares outstanding.
