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What is meant by stock split and benefits offered by it to investors ?

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Meaning of Stock Split

When a company increases its number of outstanding stocks and simultaneously reduce its stock price then it is known as a stock split. Market capitalization remains same here. The total amount of share capital is not changed, the only number of share is changed. With the stock split number of stock gets increased through the proportionate reduction its par value. If there is a stock split of 3:1 then it indicates that investor will get two stocks for every single stock they own but a value of the stock will be reduced by one third. Traders can get details of stocks which they own in their Demat account .

Objective of stock split

As already discussed stock split does not change the market value of stocks then why actually companies go for it? What are its advantages which company and investor will get from it. Although there are various reasons because of which companies do so but the most important one is that it allows companies to keep its stock price in a more comfortable zone. When stock price keeps on increasing investors may feel they can not afford to buy it. Splitting shares help to bring down the share price to a level which is more attractive. Thus the effect is psychological. Actual value does not get changed but decreased share price attracts new investors.
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Advantages for investors

There is no real advantage of stock split for investors as the true value of stock remains the same after it. But yes due to low market price there is a possibility that the share will be more actively traded in the market. The only advantage that companies offer by going for stock split is to psychologically influence more number of investors to buy its stocks. Also, traders do not need to pay additional amount to acquire stocks which are offered after stock split.

Existing shareholders get a feeling that they have a number of shares all of a sudden which they did not have earlier and if the price of share gets increased then they will be having more number of shares to trade with.The true value of the stock does not change after the stock split. Therefore it can be concluded by saying that there is no actual benefit which stock holder will gain. Investors should not buy some stock with an aim that it will split in future as they would not be getting any benefit from it.

The bottom line is that it is used by companies which have observed that their shares prices are increasing substantially. With more number of outstanding shares price per share gets decreased and no change in market capitalization is seen. Using stock split companies try to make shares more affordable.

Open a free Demat account with Pehla trade a growing discount brokerage firm to begin trading in stock market. Discount brokers offer brokerage services at very low cost. Traders can save a huge amount of brokerage and further use that capital to trade more in the market.
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