Have you ever owned a stock trading at ₹1,000, only to wake up the next morning and find its price has dropped to ₹200, while your share count has multiplied by five? If you didn’t understand stock splits, you might panic, thinking you lost 80% of your money. In reality, you experienced a **Corporate Action** called a **Stock Split**. A stock split changes your share count and the stock's face value, but leaves the company’s total valuation and your investment value completely unchanged. In this guide, we explain how splits work and why companies perform them.
What is a Stock Split?
Think of a stock split like exchanging a ₹100 note for ten ₹10 coins. The total value you hold is still ₹100, but it is now divided into more units. When a company splits its stock, it increases the total number of outstanding shares by issuing more shares to existing stockholders in a specific ratio, while reducing the price per share proportionally.
Understanding Face Value and Ratios
Every listed stock has a **Face Value** (also called par value, e.g., ₹10), which is the nominal value assigned to the stock in the company's accounting books. In a stock split, the face value is divided by the split ratio:
- 1:5 Stock Split (or 10 to 2 split): If you hold 1 share of a company with a face value of ₹10, after a 1:5 split, you will hold **5 shares** with a new face value of **₹2** each.
- 1:10 Stock Split (or 10 to 1 split): If you hold 1 share with a face value of ₹10, after the split, you will hold **10 shares** with a new face value of **₹1** each.
An Example of a Stock Split
Let's look at a concrete example using corporate numbers:
- Before Split: You hold **10 shares** of ABC Ltd. valued at **₹2,000 per share**.
- Total Investment Value: \(10 \times ₹2,000 = ₹20,000\)
- Face Value: ₹10
- Corporate Action: Company announces a **1:2 Stock Split** (reducing face value from ₹10 to ₹5).
- After Split: Your share count doubles, and the share price halves.
- Your Share Count: \(10 \times 2 = 20 \text{ shares}\)
- New Share Price: \(\frac{₹2,000}{2} = ₹1,000\)
- Total Investment Value: \(20 \times ₹1,000 = ₹20,000\)
- New Face Value: ₹5
Why do companies split their stocks?
If a split does not change the company's value, why do boards of directors approve them?
- To increase affordability: If a company’s share price rises to ₹10,000 (like MRF or Page Industries), it becomes too expensive for small retail investors to buy even a single share. A 1:10 split drops the price to ₹1,000, making it affordable for a much wider audience.
- To boost liquidity: Lower share prices attract more buyers and sellers, which increases daily trading volumes (liquidity) and reduces bid-ask spreads.