Question

Explain stock split with relevant example?

Answer 1

Stock Split: Splitting of the stocks or stock split is a common action taken by corporates that want to increase the number of outstanding shares. This is done by issuing more shares to the existing shareholders. For example in the case of a 2 for 1 stock split, the shareholder will get two shares for every share held by him. In simple terms, if there were 10,000 outstanding shares prior to the split, there will now be 20,000 shares.

Company may have reasons for splitting of thee stocks but main reasons are providing liquidity in stock, making stocks affordable for small investors. Stock split affect immediately fall in the pices of stock price but it result rise in share price after some time. Making affordable to investors increases demand for stock which drives it's price to go up and stock split also sends signal to invetors that this rise will remain continue forever so it keeps high demand for the stock.

Example: Consider a company that has 1,00,000 outstanding shares of $10 face value and there was an announcement of a split of $5 per share. Now, the same share of $10 face value will become 2 shares of $5 face value. If an investor is holding 100 shares of this company,investor will now have 200 shares of the same company after a stock split.