A stock split is a corporate action through which the existing shares of a company are split into smaller denominations so that the number of shares increases. The face value and the share price get changed based on the split ratio but the total market value remains unchanged.
Benefits and characteristics
Reduce the share price of very high priced shares so that small investors can afford them.
Increase the liquidity by increasing the number of tradable shares in the market.
Face value is decreased and number of shares is increased depending on the stock split ratio. Check the below example for better understanding.
Suppose the face value, share price and total numbers of shares were USD 10, USD 100 and 100 respectively before the stock split.
Before the split the market cap was USD 10,000 (100*100).
The equity capital before the split was USD 1000 (10*100).
Stock split at the ratio of 1:1 is done.
After the split, the face value, share price and total number of shares will be USD 5, USD 50 and 200 respectively.
After the split the market cap will be USD 10,000 (50*200).
Here the face value got decreased while the equity capital and market capitalization remain the same.
The equity capital after the split will be USD 1000 (5*200).
Total equity capital remains the same though the face value got changed.
Companies use stock split to increase the number of shares in the market or reduce the market price of the shares. Sometimes the share price of a company becomes very high because of continuous rising and becomes unaffordable by the small investors. To make them affordable by the retail investors, the companies go for stock split without changing the equity capital structure division and market cap.