How Investors can gain from Stock Split

What is Stock Split?

A stock split is a corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares.

What are objectives behind stock split?

Stock split is undertaken to infuse liquidity and to make shares affordable for small investors who could not buy the shares of that company earlier due to high prices of share.

Does it dilute Value?

No. The underlying value of each share and the total market capitalization remain the same in spite of the number of shares increases. Unlike an issuance of new shares where the total number of shares and the total market capitalization also increase, thereby reducing an existing shareholder's value, a stock split does not dilute existing shareholders value. The ownership of existing shareholder does not get affected due to stock split.

Why do Companies opt for Stock Split?

Sometimes the price of a company's shares rise so much that it may discourage investors from buying them. So, the company decides to reduce the cost per share by way of a stock split. This also helps in increasing its overall liquidity as new investors may show interest in buying shares. 

How does it benefit investors? 

A stockholder will get two or three shares for one share without any additional cost, making it easier to carry out trades. Also, stock splits can be a best way for retail investors to accumulate a higher number of shares of blue-chip companies which are more expensive. 

Waht is effect of stock split on Share price?

When a stock split takes place, the share price of the stock is adjusted by the inverse of the split ratio. If the share price was $80 before the 2 for 1 split, the stock will start trading at $40 per share after the completion of stock split. The purpose behind a stock split is to bring the share price down to a range where the board of directors believes it will be more attractive to investors.Stock splits are viewed as a positive event and an investor who buys before the split may see a stock price increase after the split due to more investors buying the stock.