By reducing the face value of the stock, a firm can increase the number of shares it has outstanding through a stock split. Because the stock price declines following a share split, companies typically split shares to boost liquidity. A split raises the total number of shares while lowering the investment’s face value, but the overall value stays the same. The split shares will be credited within a week.
For instance, if a stock splits in a 2:1 ratio with a face value of 10, the new face value of the stock will be $5. If you had one share of $10 prior to the split, you would now have two shares of $5.
The new level of demand that develops when additional investors purchase the more affordable shares may be advantageous to present shareholders, even if a stock split has no impact on the net worth of an existing shareholder’s stock. The price of the stock would likely increase once more as new investors purchased shares. Even if they are only temporary, long-term value increases for current owners are possible.
It’s critical to realise that following a stock split, just the share price and the total number of shares change. The market capitalization and the value of each shareholder’s interest are both constant.
The inverse of a stock split is a reverse stock split, which raises the share price while lowering the number of shares outstanding. A 1-for-2 reverse stock split, for instance, would give you one share for every two shares you already own while maintaining the value of your holding. This is a less common corporate action that is typically taken to aid the company in maintaining its listing on an exchange when its share price falls below the required minimum.
