Stock split is an action taken by a company to increase the number of shares in the public. The company adjusts the price of the shares taking into account of market capitalization i.e. estimating the value of a business so that it neither affects the company nor any weakening occurs due to this. The shares are split into a specific multiple thus increasing the total number of shares in the public but as a result, no change is seen in the dollar value of the shares.

Stock Split is variedly seen from as many perspectives. Some consider that if a stock split occur, there will be an increase in the share price and investors start buying the shares as a result there is a real increase in the price of a share. Where, some consider it that it is a contest held by the management of the company showing the future investors (large, medium and small) the bright possibilities of the company. Whatever be the reason, it is seen that stock split has often increased the share price of the company. This split is a great deal started after a success run in the share price. According to a report, this drift will continue in the long run no matter whether this affects the share price or not.

An MNC having a high market value selling very high minimum number of shares in the market, if decided to reduce the share price attracts small investors in large numbers. The reduced share price convincible gets hold of the small investors attention who is interested in investing in small lots. These small investors will have almost paltry encroachment on the whole price collected for the company.

The most common instance given in connection with Stock Split is as follows:

Before Stock Split

No of Shares: 100

Price of a share: $50.

Market capitalization: 100 $50 = $5000.

Company decides to splits its stock: "2-for-1".

Now, After Stock-Split

No. of shares: 200 shares of stock

Each shareholder holds: TWICE as many shares

Price of a share adjusted: $25 Market capitalization: 200 $25 = $5000, the same as before the split.

The most common stock split is taken for 2-1, 3-1, and 3-2 whereas 4-3, 5-2 and 5-4 are not rare as well.

Why Stock Split Does Happens

A stock split is the decision taken by the BOD (Board of Directors) when they see that the share price of their stock have reached to an exponential level or is higher than the companies dealing in the same area. This is mainly aimed to reach the masses and make the shares available to the small investors. The trade done by the small investors is regarded as the 'odd-lots" and assuring that the fundamentals of the company still remains the same.

On the other hand, sometimes the stock split results is high share price as small investors starts investing in the company more, due to the reduced share price and again the demand of the shares start increasing. Another facet of increase in share price is that, people assume that there is a tremendous future growth and possibilities in the company thereby resulting huge demand of the shares.

Understanding Stock Split

Stock Split is having more than one facet to discover. An advantageous facet of stock split to the investors is that it signals very clearly that the company is faring well and is bringing down the price of its share to an attractive level making it more approachable.

Looking at the darker side, Stock Split says that if there is no fundamental change in the value of the stock then what is the actual use of stock split and how will it help the investors. Now, we can say that both the arguments are correct and politically correct but surveys convey that no matter what it affects or not, this will a trend and will continue to be there in the long run ruling the share market and the minds of directors of the company.

The fundamentals at the end corrects that stock split is a tempting factor or a good buying indicator for the stock buyers.

Reverse Split

As the name suggests, Reverse Split is just the opposite of stock split which is adopted by those companies which have seen a fall in their price of a share. Hence, the ratio is also affected such as: 1-2, and 1-3. This is indeed a good way to increase the price of a share so that it can maintain liquidity and respectability without getting de-listed from the Stock Exchange.

It is seen that Reverse Split is done to reduce the number of shareholders from the company. The ratio at which the company has decided to do reduce split the shareholders having less than the cut-off number of shared will be given the cash payment and no shares of stock which will in a way, reduce the number of stakeholders of the company. Although, this will not help the majority, but to some extent, this will definitely help. Then this number of shareholders will be placed into a different regulatory category.

Conclusion

The motif behind this stock split is to make the company's share more affordable for the medium and small investors as to provide the company with more runniness and reputability in the share market.