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Stock split

Published: Friday, 16 October 2020

This is another way of increasing retail participation and is a quite common phenomenon in the share market. Here the face value of the stock is split into smaller denominations thereby bringing down the market price proportionally. 

An illustration will make things clear:

Split Ratio

Old FV

No of the shares held before split

Share Price before split

Investment Value before split

New FV

No of shares held after split

Share Price after the split

Investment value after split

1:1

10

100

600

60000

5.0

200

300.0

60000

1:5

10

100

600

60000

2.0

500

120.0

60000

1:10

10

100

600

60000

1.0

1,000

60.0

60000

 

Due to a stock split the number of shares held by the shareholder increases but the investment value remains unchanged just like a bonus. Only the face value reduces. Say the face value of a stock is Rs.10, and a 1:1 stock split is announced. Here, the face value will be split in half. 

But since the market value of shares remains unchanged, and the price per share has to reduce in the same proportion as the face value and the number of shares has to increase inversely. This means a stock split of 1:1 will reduce share price by half and the number of shares outstanding will double.

 


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