Prajna Capital - An Investment Guide

Stock split is the process of splitting shares with high face value into shares of a lower face value. It’s like getting an Rs.20 note changed for two Rs.10 notes. The value changes of neither note nor splitted stock. Effect of stock split A stock split increases the number of shares in a public company. The price is adjusted such that the market capitalization of the company almost remains same. Why stock split is done? 1) Companies usually split their stock when they think the price of their stock exceeds the amount smaller investors would be willing to pay. “It is aimed at making the stock more affordable and liquid from retail investors’ point of view.” 2) Generally, there are more buyers and sellers of shares trading at Rs.100 than say, Rs.400, as retail shareholders may find low-price stocks to be better bargains. Stock splits are usually initiated after a huge run-up in the share. This run-up may be linked to the performance of the stock. 3) The company may declare such splits i...