What is a Stock Split?
When a company decides to split a share into 2 or 3 or n number of smaller fractions, the price of the resulting shares is also reduced by the same factor of 2 or 3 or n respectively so that the market capitalization of the company remains the same.
For eg:-
Consider that Google currently has 1 million shares at a price of $50, now if Google decides to split each share into say 4 shares then
No. of shares = 1million * 4 = 4million
Price of each new shares = $50/4 = $12.5
So that the total market valuation is constant which is $50 million.
Why is it beneficial?
When a company decides to split a share into 2 or 3 or n number of smaller fractions, the price of the resulting shares is also reduced by the same factor of 2 or 3 or n respectively so that the market capitalization of the company remains the same.
For eg:-
Consider that Google currently has 1 million shares at a price of $50, now if Google decides to split each share into say 4 shares then
No. of shares = 1million * 4 = 4million
Price of each new shares = $50/4 = $12.5
So that the total market valuation is constant which is $50 million.
Why is it beneficial?
- Many times the price of the share becomes too high for many sections of the buyer community that they find it unaffordable to trade in the shares of the company, if the company decides to split the shares, this will result into more no. of shares but at a lower price, thus enabling the investors to invest or trade in it's shares.
- splitting also increases the liquidity of the shares of the company.
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