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A stock split is what happens when a listed company splits its shares outstanding into more shares. The company’s market cap and the value of each shareholder’s investment stay the same during a stock split, but the value of each share is reduced while the number of shares increases.

The purpose of a stock split is to attract new investors in order to increase market cap over the medium to long term. Often, when a company splits its stock – or even announces its intention to do so – it causes volatility in the share price. Many investors see a stock split as a sign a company is performing well, so the stock value increases due to investor optimism. Traders, too, view stock splits positively, as they can create market volatility, which leads to more trading opportunities.

When splitting stocks, a company will first determine a split ratio – this is the ratio by which the company will multiply the number of existing shares and divide the current share price. For example, if the split ratio is 2:1, the number of shares will double and the share price will be halved. To calculate the value of a share following a stock split, simply divide the price before the split by the first number in the ratio, like in this example:

You own ten shares in a company, each valued at $100 prior to a stock split of 2:1, giving you a total of $1000 worth of shares. After the split, you own 20 shares, each worth $50 ($100 ÷ 2). Your total investment values stays the same at $1000.

Companies split stocks mainly to make them more affordable for retail investors and therefore attract more investment. They may also want their stock to be more liquid. It’s a calculated decision that can only be made by the company’s board of directors.

Implications of a Stock Split on Investor-

Stock splits don’t inherently affect market cap or the value of an investor’s shareholding, but the sentiment they create can induce medium- to long-term growth due to increased number of participants owing to the affordability.

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