A stock split is a process used to increase the number of shares in order to issue more shares to current shareholders. In simple terms, when a company likes to increase the number of shares in the market, astock split is used. For example, if an investor holds 100 shares of ABC at Rs.100 per share, then it uses 2-1 stock split will result in owning 200 shares worth Rs.50 per share. The outcomes of stock split process result in company’s increase of number of shares and reduction in prices but market capitalization remain the same.
The most common methods of stock splits are 2-1, 3-2 and 3-1. Depending on the real time requirements, the different methods are used accordingly. One of the best ways to calculate the new stock price is to divide the previous stock price by thestock split ratio. For example, if a company adopts 2-1 stock split option, then divide Rs.100 by 2 that will result in Rs.50 per share. For 3-1 stock split option, then divide: Rs.100/3 will result in Rs.33.33 per share overall.
The other possible option of stock split is termed as reverse split i.e. 1-10 ratio means to investors is that every 10 shares investors own will be considered as 1 share. This procedure is generally used by companies with low stock prices. The companies would like to increase the stock prices in order to gain more credibility in the market and prevent any delisting activities accordingly. In any case, the company’s worth won’t change of opting stock –split or reverse stock-split.
Thus, stock split procedures help companies share to be more affordable to small pool of investors and also provide greater liquidity and marketability of its stocks in the market. The most important thing to investors is that to keep in mind:stock split is not a sole deciding factor to buy a company’s stock because this will not effect in case on the worth of the company at all.