In recent years, stock splits have become a hot topic in the Indian share market. From big names like Reliance Industries to IT giants like TCS, a stock split often triggers a wave of new investor interest. But what exactly is a stock split? How does it affect your investments? And why does it attract fresh buying even though the company’s fundamentals remain unchanged? This article will provide a clear, detailed and easy-to-understand explanation about stock splits, perfect for all investors who want to make better sense of the share market.
Overview of stock split
A stock split is a business decsion where a organisation raises the volume of its outstanding shares by issuingsome more to present shareholders. However, this increase in share quantity comes with a proportional decrease in the price per share. For example, in a 2-for-1 stock split, every shareholder receives two shares for each one they own, but the price per share halves.
It’s important to note that a stock split doesn’t really change the fundamentals of a company. The market value or the overall size remains the same. Instead, a stock split simply adjusts the number of shares to make the stock more affordable for retail investors. Because the price per share becomes more manageable, fresh investors often find the stock attractive, leading to increased buying.
What is share market meaning and its basic functioning
The share market or stock market is a platform where people buy and sell shares of publicly listed companies. Think of it as an enormous marketplace that connects buyers and sellers. Here, companies raise capital by offering shares to the public, and investors gain ownership in those companies.
Shares represent a fraction of ownership, and their prices fluctuate based on company performance, economy, demand-supply dynamics, and investor sentiment.
Understanding the share market meaning helps investors make informed choices. For example, when you hear about a stock split, knowing it doesn’t alter a company’s value but influences share price and liquidity is crucial.
Why stock splits don’t change company fundamentals
It is common to misunderstand stock splits as an event that increases a company’s value. But fundamentally, a stock split is neutral. Here’s why:
No change in market capitalisation: Market capitalisation is the total value of a company’s shares in the market. It is calculated by multiplying the share price by the total number of shares. In a stock split, both the price and the number of shares change proportionally, which keeps the market cap constant.
No impact on earnings or assets: The company’s profits, assets, liabilities, and overall business operations remain unchanged. Only the number of shares outstanding increases, meaning each share represents a smaller portion of the company.
No impact on dividends per share (initially): Dividend payouts per share are adjusted after a stock split so that the total dividend remains the same when multiplied by the new share count.
To illustrate, if Reliance Industries shares trade at Rs. 2,000 and it announces a 5-for-1 stock split, post-split, the price will approximate Rs. 400 per share. If you owned one share before, you would now own five shares, each worth Rs. 400, keeping your overall investment value the same.
Why stock splits attract fresh buying in the indian share market
Despite no change in fundamentals, stock splits typically lead to increased buying. Here’s why:
Affordability for retail investors
High share prices can discourage first-time and small investors. When a stock splits, the price per share falls, making it more accessible to retail investors who might have hesitated before. For example, a share worth Rs. 2,500 could be difficult for many young investors. After a 10-for-1 stock split, the price becomes Rs. 250, which looks more attractive and affordable.
Psychological effect and perception of growth
Stock splits are often seen as a signal from companies that their share price has grown significantly. This creates a positive sentiment or confidence among investors. They perceive the company as stable, growing, and a promising investment even if the fundamentals are unchanged.
Improved liquidity in the share market
More shares at lower prices mean more people who buy and sell can participate. Increased liquidity helps reduce price volatility and makes it easier to buy or sell shares. This attracts not just retail investors but also institutional buyers.
Stock split examples in india and their impact
Reliance industries limited
In 2020, RIL announced a 1-for-15 stock split. The stock price was around Rs. 2,000 before the split. After splitting, shares started trading at around Rs. 133. The split made Reliance stock much more accessible to retail investors, leading to a surge in volumes and fresh buying interest.
Tata consultancy services
In 2020, TCS declared a 1-for-5 stock split. Before the split, TCS shares traded around Rs. 2,200, which reduced to nearly Rs. 440 post-split. The move attracted many new retail investors who could now afford TCS shares without high capital.
HDFC Bank
HDFC Bank’s stock split in 2020 (5-for-1) reduced the share price from Rs. 1,400 to Rs. 280. This made HDFC Bank stocks more affordable without affecting the company’s strong fundamentals, helping retail participation grow.
How to approach investing when a stock split occurs
A stock split doesn’t increase a company’s actual value, but it can create a good opportunity to invest. If you’re a new investor, this might be the right time to open a demat & trading account and start your investment journey. However, don’t buy shares just because they’re cheaper after a split — always check the company’s financials, performance, and long-term potential. If the fundamentals are strong, a stock split can be a great chance to accumulate more shares at a lower price. Just stay patient and invest based on your goals.
Conclusion
A stock split can be considered to be a straightforward business action aimed at increasing the liquidity and accessibility of a stock, especially beneficial for retail investors in India stepping into the share market. While a stock split does not alter a company’s intrinsic value or fundamentals, it creates an environment that attracts fresh buying due to lower share prices, improved liquidity, and positive investor sentiment.
Understanding the share market meaning and recognising the true nature of stock splits will help investors avoid confusion and focus on the right reasons to enter or exit the market. For a beginner or experienced trader alike, knowing that stock splits simply adjust share prices while the company’s economic position remains unchanged is crucial.