Stock split is a technique used to infuse liquidity and make share’s prices more affordable for investors. A company, whose share’s prices are beyond the reach of average investors, splits its shares by increasing the total number of outstanding shares. Usually, the shares are increased in the multiples like 2 or 3 for 1, which means that the shareholder will have two or three shares for every share held by him earlier.
It should be kept in mind that, only the number of shares is increased and not the total market capitalization of the company. So, stock split results in the decrease in share’s price and thus they become more affordable for investors.
Example of stock split:
XYZ Ltd has total 100,000 outstanding shares, each valued at INR 5,000. So the total market capitalization of the company is 500,000,000. Let’s suppose that the company splits its shares into 2 for 1.
The total no. of shares is = 100,000 × 2 = 200,000
But the total market capitalization of the company is = 500,000,000.
So, the share price will be = 500,000,000/200,000 = 2500.