How Does a Stock Split Benefit Shareholders | Motilal Oswal (2024)

Share this article

How Does a Stock Split Benefit Shareholders | Motilal Oswal (4)

There are various reasons why investors are drawn to the share markets for garnering substantial rewards these days. In fact, in the present day and age, with the rise of technology and smart apps to conduct trading with, a plethora of young traders can be found trading on an almost daily basis, balancing work life, or even education, with trading activity. The share market can have a number of rewards for shareholders, not just in terms of profits, but also with regular dividends on share investment. Other benefits of investing in the share markets include a share split, and this needs to be understood well by any shareholder.

During their regular course of business, listed companies take a lot of corporate actions. By corporate actions, we mean distribution of dividends, issue of bonus shares, and stock splits. Distribution of dividends is usually the most popular and often used by companies, stock splits, on the other hand, is quite rare to come by. Wondering what a stock split is? Here’s some information that can give you clarity on this unique corporate action.

  • What is a stock split?

To understand stock split meaning, you must first think of it as an action that a company whose stock you have undertakes. A stock split is a corporate action, where a company splits its shares into multiple new ones. Split shares neither add any new value, nor dilute the ownership stake of the shareholders. However, what they do is increase the number of shares of the company.A stock split could well make the shares of any given company seem more affordable. However, when the company’s stock splits, there is no real alteration in the company’s value. Here’s an example to help you understand the concept better.

Imagine a company. It has issued around 1,00,000 equity shares of face value of Rs. 10 per share. The company decides to split its shares in the ratio of 2:1. What this essentially means is that every share of the company will now be split into two. This will, in effect, increase the number of equity shares of the company to 2,00,000 from the erstwhile 1,00,000. And simultaneously, the face value of the shares would also come down to Rs. 5 per share.By now, you would have clearly understood the stock split meaning.

  • What are the advantages of stock split?

Now that you know the stock split meaning, let’s take a look at how it benefits shareholders.

1. It makes the shares more accessible

High share prices is one of the primary reasons why companies choose to split shares. When a company’s share price rises exponentially, it can dampen the investor demand.

Investors, especially retail investors, generally prefer buying 10 shares that are priced at Rs. 500 per share than buying 5 shares that are priced at Rs. 1,000 per share. However, through share splits, a company can reduce its share prices and can make it more accessible to investors without changing its value whatsoever.

2. It increases liquidity

Another one of the main stock split benefits is that the shares of a company generally see increased liquidity. Since shares have now become more accessible to retail investors, more people would show increased demand for it, which can increase liquidity in the counter. Buying and selling shares will be far easier after a stock split.

  • A Real World Example

Any upcoming stock splits may excite investors for all the good reasons mentioned before. When any company’s stock undergoes a split, the resultant share price may be increased. This is often followed by an almost immediate decrease in the price, but investors may well turn a profit if they act fast. The reason for the initial price increase is that many small investors may want to buy the newly “affordable” stock, increasing demand for it. Another possible rationale for the price increase could be that a stock split gives the market a clear signal that the share price of any company is on the rise. Individuals automatically assume that this growth will continue into the future. This lifts the demand further and the prices as well.

In a stock split example from the real world of share market investment, Apple Inc. split its company’s shares at seven-for-one. This was largely done with the aim of making the company’s shares more accessible to several investors. In the period just preceding the split, the price of the share was at about $649.88. When the split finally occurred, the per share price at the opening bell of the market was at $92.70, in other words, 648.90/7.

Other Advantages of a Share Split

Along with a split in shares and the benefits it may hold for many investors, both large and small, there are some additional benefits. These, of course, vary from company to company and their financial and other objectives. In the example of Apple Inc., existing holders of shares received six additional shares for every share that was owned by them. So, if any given investor owned 1,000 shares of Apple Inc. before the splitting activity, had 7,000 shares after the stock was split, along with the additional amount of shares allotted. By the time the split took place, the company’s shares increased from 861 million to 6 billion. Nonetheless, the market capitalisation of Apple Inc. remained more or less the same as before the split, at $556 billion.

Conclusion

As with other corporate actions like bonus share issues, stock splits are also automatically credited to your demat account within 4-5 days from the record date issued by the company. You can check your demat holding statement to ensure that the split shares are credited appropriately. Want to create an online demat account, but don’t know where to start? How about reaching out to Motilal Oswal? You can create one for free within minutes. Get going now!

Related Articles:How to Open a Demat Account Without a Broker|Factors to Keep in Mind While Opening a Demat account|Factors to Consider When Opening a Demat Account

Popular Stocks: ONGC Share Price | SBI Life Share Price | UPL Share Price | TCS Share Price | Titan Share Price

Be the first to read our new blogs

Intelligent investment insights delivered to your inbox, for Free, daily!

How Does a Stock Split Benefit Shareholders | Motilal Oswal (2024)

FAQs

How Does a Stock Split Benefit Shareholders | Motilal Oswal? ›

In the event of a stock split, the number of shares increases and the face value of each share reduces, thus making it easier for new investors to show interest and invest in the company's stock. In other words, there can be an increase in the number of shareholders as more investors would buy at lower prices.

How do share splits benefit shareholders? ›

What are the benefits of stock split? The stock split benefits are improved liquidity, reduced share price, increased accessibility for retail investors, and a potentially positive impact on market perception.

Does a stock split increase shareholder value? ›

A stock split doesn't make investors rich. In fact, the company's market capitalization, equal to shares outstanding multiplied by the price per share, isn't affected by a stock split. If the number of shares increases, the share price will decrease by a proportional amount.

What happens to shareholders after stock split? ›

So, if you owned 5,000 shares of stock at a price of 10 cents per share worth a total of $500 before the reverse split, you would own 25 shares at a price of $20 each after the reverse split, maintaining that total value of $500. The amount of money you have invested doesn't change, just the number of shares you own.

What are the pros and cons of a stock split? ›

Understanding the intricacies of stock splits unveils their potential advantages in enhancing liquidity, affordability for investors, and renewed market interest. However, these actions come with associated costs, regulatory requirements, and perceptions that might not always align with a company's strategic goals.

How do you profit from stock splits? ›

Put the long-term prospects ahead of the momentary price swings. Time is of the essence; buy only when the market has settled following a split. This strategy ensures that, once the immediate thrill of a stock split wanes, decisions are made with knowledge.

What is the primary purpose of a share split? ›

The primary purpose of a stock split is to reduce the market price of the stock per share and increase the number of shares outstanding.

Is a 20% for 1 stock split good? ›

When a company divides each existing share into 20 new shares, that also means that each share is now worth one twentieth of the original value. The market value of the company, however, does not change. In short, Amazon stock is going to become a lot more affordable to the everyday investor who wants in.

How does a stock split affect shareholders' equity? ›

When a company's stock splits, the change in the par value is offset by a corresponding change in the number of shares so the total par value remains the same. The total stockholders' equity is unaffected by the stock split and no entries are recorded.

Does the investor lose money after a stock split? ›

A stock split lowers its stock price but doesn't weaken its value to current shareholders. It increases the number of shares and might entice would-be buyers to make a purchase. The total value of the stock shares remains unchanged because you still own the same value of shares, even if the number of shares increases.

Is it better to buy stock before or after a split? ›

Do stock splits benefit investors? – It's nice to own more shares after a split, since the reduced per-share price might mean there's room for greater potential price growth.

Is a stock split taxable? ›

Stock splits don't create a taxable event; you merely receive more stock evidencing the same ownership interest in the corporation that issued the stock. You don't report income until you sell the stock. Your overall basis doesn't change as a result of a stock split, but your per share basis changes.

What stocks are expected to split in 2024? ›

3 Potential Stock Splits to Add to Your 2024 Radar
  • Broadcom (AVGO) Source: Sasima / Shutterstock.com. Broadcom (NASDAQ:AVGO) is the most expensive stock on this list on a per-share basis. ...
  • Deckers Outdoor (DECK) Source: BalkansCat / Shutterstock. ...
  • Nvidia (NVDA) Source: Poetra.RH / Shutterstock.com.
Mar 20, 2024

Are stock splits good long term? ›

The split may elicit additional interest in the company's stock, but fundamentally investors are no better or worse off than before, since the market value of their holdings stays the same.

What is the most expensive stock? ›

The most expensive stock is Berkshire Hathaway's Class A stock. Luckily, its Class B stock is much more affordable.

How would a share split affect asset and shareholders equity? ›

There is no change in total assets, total liabilities, or total stockholders' equity when a small stock dividend, a large stock dividend, or a stock split occurs. Both types of stock dividends impact the accounts in stockholders' equity. A stock split causes no change in any of the accounts within stockholders' equity.

Does a share split normally increase total shareholders equity? ›

A stock split just increases the number of shares outstanding for a firm. The overall market capitalization or the total stockholders' equity does not change due to the stock split but the market price per share decreases.

Top Articles
Latest Posts
Article information

Author: Kimberely Baumbach CPA

Last Updated:

Views: 6012

Rating: 4 / 5 (41 voted)

Reviews: 80% of readers found this page helpful

Author information

Name: Kimberely Baumbach CPA

Birthday: 1996-01-14

Address: 8381 Boyce Course, Imeldachester, ND 74681

Phone: +3571286597580

Job: Product Banking Analyst

Hobby: Cosplaying, Inline skating, Amateur radio, Baton twirling, Mountaineering, Flying, Archery

Introduction: My name is Kimberely Baumbach CPA, I am a gorgeous, bright, charming, encouraging, zealous, lively, good person who loves writing and wants to share my knowledge and understanding with you.