Stock Split

Posted in Finance, Accounting and Economics Terms, Total Reads: 997
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Definition: Stock Split

Stock split is a process wherein each share of a company is broken into smaller number of shares. In this process, the number of shares held by an individual investor and the value of each share changes, but the total market capitalization remains the same. The stock split is done in a specific ratio (2 for 1, 3 for 1 etc).

 

Stock split is usually done for two reasons:-

• When a company’s stock price is too high and it wants to reduce the price of its share so that people with limited amount to invest can also buy the company’s shares. This will help the company to widen its shareholder base.

• Smaller value of a share resulting from a stock split increases the liquidity of shares.

 

Example:

A company ABC ltd. has 1000 shares of INR 10 each. The total capitalization of the company in this case is INR 10000. Now the company goes for a stock split of 2 for 1. The number of shares now becomes 2000 of INR 5 each. However, the market capitalization remains the same at INR 10000.

 

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