Investment word of the day: Stock split — how does it work and why do companies opt for it?

Investment word of the day: With the changing financial landscape, companies are opting for various corporate actions to achieve specific goals. A corporate action is a decision by a company that may significantly impact its shareholders and the market. One such action is a stock split.

What is stock split?

A stock split is a corporate action in which a company divides its stock into multiple shares to lower the price of each share without changing the market value of a company. For instance, in a two-for-one split, an investor who owned one share priced at ₹100 would end up with two shares, each worth ₹50 but with the same total value.

Stock split aims to increase the liquidity and trading volume of a company's shares. However, this corporate action redistributes ownership into smaller units rather than changing the total value of the company. Investors can check the stock split action of every listed company on the BSE and NSE websites.

How does a stock split work?

A stock split increases the number of shares in the market. For example, if a company announces a 2:1 stock split, the number of outstanding shares doubles. Hence, a shareholder with one share previously will now have two shares while the value of the holding remains the same.

Additionally, the price of an individual share is adjusted according to the split ratio.

Why do companies opt for stock split?

After understanding how stock split works, it becomes important to know why companies choose this corporate action.

“In the year 2025, Indian companies turning towards splits, as strategic financial manoeuvres, is trending in the developing capital markets. By splitting existing shares into multiple units without interfering with the fundamentals, Reliance Industries and HDFC Bank increase the accessibility of their stocks to retail investors, an important community now representing 37 per cent of India's equity ownership,” according to Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Private Limited.

The rising participation of retail investors would help increase trading volumes.

“With an enhanced retail investor participation in mind from SEBI and total demat accounts added up to more than 150 million, making share prices affordable means enhancing trading volumes as well as intrinsic liquidity,” Maurya said.

“The psychological edge cannot be denied: A share that used to cost ₹5,000 now costs ₹1,000—an appearance more within reach, even if the valuation stays unchanged. Such a perceptional change is usually expected to generate a trading activity increase of 15-20 per cent within three months post-split,” he added.

It is believed that stock split is an entry point for middle-class investors in high-growth sectors such as renewable energy, EV manufacturing, etc., with skyrocketing share prices, as per the expert.

A stock split enhances liquidity. However, investors must note that this action does not change the company's actual value. Hence, when analysing a company's financial performance, other factors such as revenue, profit margin, and cash flow, rather than just the stock split, should be taken into account.