All listed companies in the stock market have certain number of shares issued to the shareholders of the company carrying a certain value for each share. A stock split is division of the face value to a lower value, such that number of shares outstanding increases, without a change in the market value or company’s market capitalisation.
It is simply a mathematical adjustment undertaken with a view to increase tradability in the stock, by lowering the per share price. It is important to note that the market capitalisation of the company remains unchanged with a stock split. Only the number of shares increases and the share price drops proportionately.
Stock split are usually announced in a particular ratio say 5:1, 2:1,1:1 or any other combination which states that now value of each share will be split into certain amount of shares.
Some recent examples of stock split are Phillips Carbon (ratio of 5:1), with face value of share going down from Rs.10 to Rs.2 and Thirumalai Chemicals (ratio of 10:1) and face value coming down from Rs.10 to Re.1.
Companies undertake stock split in cases when the management is of the view that the stocks have priced out and a split will make the price more affordable and accessible to the investors. This strategy is used by the companies whose stock price has risen significantly more than of the similar companies within an industry. E.g. investors of Eicher Motors and MRF Tyres have been hoping for a stock split from the company as their share prices are close to Rs. 19,000 and Rs. 61,000 respectively. Since investors need to shell out Rs. 61,000 to buy one share of MRF Limited, liquidity and market depth on the counter is poor.
Thus, a stock split allows more liquidity to a company’s stock.