alexa
Indianmoney.com Missed Call Number
Home Articles What Is A Stock Split?

What Is A Stock Split?

IndianMoney.com Research Team | Updated On Wednesday, November 14,2018, 04:16 PM

5.0 / 5 based on 1 User Reviews

What Is A Stock Split?

 

 

 

Investing in stocks is all about money. Its high returns, but at high risk. Your money can double in no time, or you can suffer heavy losses. This is why you must never invest in stocks unless you really understand the stock markets.

Let’s focus this discussion on stock splits. It’s a simple decision by the Company Board to increase the number of outstanding shares. By outstanding shares, we mean Company stock currently held by all its shareholders.

What is a stock split? Let’s say you have shares of a Company which goes for a 1:1 stock split. You get one additional share for every one share you hold. If a Company goes for a stock split, the number of outstanding shares in the market go up, but the market capitalization of the Company remains the same. If the number of outstanding shares goes up, the price per share comes down.

Want to know more on Investment Planning? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

 

You May Also Watch: 

 

 

What Is A Stock Split?

 

Let’s understand stock splits. All publically traded Companies (Companies whose shares are listed on the stock market) have a set number of shares which are outstanding. These shares have a specified face value. Outstanding means shares which are subscribed (taken up) by investors. In a stock split, the Board of Directors of a Company decides to increase the number of shares and proportionately reduce the Face Value.

 

Understand stock splits with examples:

 

1:2 Stock Split:

 

In a 1:2 stock split, every shareholder who owns two shares is given an additional share. If a Company had 1 Crore shares outstanding before the stock split, it will now have 2 Crore shares outstanding after the 1:2 Stock Split.

The price of the stock reduces as the number of shares outstanding has increased. The market capitalization remains the same.

    

You own 150 shares of a Company XYZ Ltd whose Face Value was 2.  The price of each share of XYZ Ltd is Rs 1,000.

The stock splits in the ratio 1:2. After the stock split, the New Face Value is 1.

Change in price after stock splits = Rs 1000 * 1 / 2 = Rs 500.

                                                                                                                   

The number of outstanding shares have changed and also the share price. Market capitalization remains the same.

Before the stock split, you owned 150 shares of Company XYZ Ltd where the price of each share was Rs 1,000. After the stock split of Company XYZ Ltd, you own 300 shares of Rs 500 each.

(Before stock split)

Market Capitalization = Market Price Per Share * No. of outstanding shares.

Market Capitalization = 1000 * 1 Crore = 1000 Crores.

(After stock split)

Market Capitalization = Market Price Per Share * No. of outstanding shares.

Market Capitalization = 500 * 2 Crores = 1000 Crores.

The market capitalization remains the same.

 

1:5 Stock Split:

 

In a 1:5 stock split, every shareholder who owns 1 share is given an additional 5 shares. If a Company had 1 Crore shares outstanding before the stock split, it will now have 5 Crore shares outstanding after the 1:5 Stock Split.

The price of the stock reduces as the number of shares outstanding has increased. The market capitalization remains the same.

 

 

You own 150 shares of a Company XYZ Ltd whose Face Value was 10.  The price of each share of XYZ Ltd is Rs 1,000.

The stock splits in the ratio 1:5. After the stock split, the New Face Value is 2.

Change in price after stock splits = Rs 1000 * 1 / 5 = Rs 200.

                                                                                                                     

The number of outstanding shares have changed and also the share price. Market capitalization remains the same.

Before the stock split, you owned 150 shares of Company XYZ Ltd where the price of each share was Rs 1,000. After the stock split of Company XYZ Ltd, you own 750 shares of Rs 200 each.

(Before stock split)

Market Capitalization = Market Price Per Share * No. of outstanding shares.

Market Capitalization = 1000 * 1 Crore = 1000 Crores.

(After stock split)

Market Capitalization = Market Price Per Share * No. of outstanding shares.

Market Capitalization = 200 * 5 Crores = 1000 Crores.

The market capitalization remains the same.

 

SEE ALSO: What If You Have Missed The Deadline For Filing Belated ITR?

 

Understand NBCC Stock Splits:

 

NBCC India Limited is a Navratna Organization and a Central Public Sector Undertaking. It is into the Real Estate Development, Construction Business and the Project Management Consultancy.

NBCC fixed April 26th 2018 as the date for the stock split of 1:1. The old face value was 2 and after the stock split, the face value changes to 1. You get 1 additional share of NBCC for every 1 share you hold.

The price of NBCC shares halved while the number of outstanding shares doubled. If you had 36 shares of NBCC before the stock split, you will have 72 shares of NBCC after the stock split.

See Also: Stock Exchanges In India

 

 

What are the benefits of stock splits:

 

  • The shares of the Company become affordable:

 

A Company opts for stock splits when it believes its shares are too costly. Stock splits make the shares of a Company really affordable. The price falls and small investors grab these shares. As more and more investors pick up the shares, the demand increases and prices go up.

 

  • Stock splits help in price discovery:

 

If a Company goes for a stock split, investors believe the Company’s share prices have been increasing and this massive growth will continue in the future. They start purchasing these shares and the demand goes up. The prices of these shares rise. This is called price discovery.

 

Be Wise, Get Rich.

 

Did you find this article useful? You can Rate us
5.0 / 5 based on 1 User Reviews
Article Author

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

Subscribe to our Youtube Channel

Most Popular

Why one must never neglect estate planning

07 January 2014, Tuesday

Things to Know About Hybrid Mutual Funds

26 November 2013, Tuesday

What is Car Insurance? Why is it important?

21 October 2009, Wednesday

Latest Stories

Personal Loan For Students

15 November 2018, Thursday

Aadhaar Pay App

14 November 2018, Wednesday

Review Your Financial Plans With Indian Money

14 November 2018, Wednesday

Post Office Monthly Income Scheme

14 November 2018, Wednesday

Popular Tags

GST
UK

Calculators

Get It now!