A stock split is a decision by the company’s board to increase the number of outstanding shares. The number of shares of that company increases, but the market cap remains the same. As a results number of shares increases but the price per share goes down.
E.g. – Suppose the share price of a company is Rs 100 and a shareholder had 1 share of a company. That time the net asset of the investor was Rs 100.
Now the company decides to split the stock, in the ratio of 1:1, it means now shareholder gets total 2 shares. But now the share price of the company adjusted to Rs 50 and the net asset of the investor is still Rs 100.
Here you can see that the number of shares of the company increases but the net asset is the same as the previous.
- Though the number of shares increases, the underlying value of each share and the total market capitalization remain the same.
- A stock split or share split increases the number of shares in a company. The price is adjusted in such a way that before and after market capitalization of the company remains the same.
- A company may split its stock when the market price per share is so high.
- Stocks split help in increasing overall liquidity as new investors may get interested in purchasing shares.
How Stock Split is different from a bonus issue of shares?
A company announces a stock split when the share price of the company increases too high or beyond certain level whereas the company announces a bonus issue when its cash reserves increase and it decides to convert the increased value into shares. Thus the shareholder gets a bonus share free of cost.
In Bonus Share, there is no change in face value but in Stock Split the face value of the stock is adjusted accordingly.