Sep 30, 2014

Effect of Stock Split and Why do Companies Split Stock

Here are few points about Stock split and why companies do this.

Stock split increase liquidity of shares. More outstanding shares increase liquidity and thus can help better determice true price.
It does not change company capitalization as total value of share remain shame. It just make Rs 100 bill into two Rs 50 bill.
It can add in sentiment that stock is cheaper and does not affect in any other way regarding valuation of the company stock.

Stock split happens to increase liquidity, make it look comparative compared to peers. Cheaper stocks may look attractive to retail and esp. small investor.
Stock price after split can go either direction and it is not guaranteed that it moves upward. So, do not bank on stock split for gain. See the fundamentals before buying the stock. If stock is undervalued then stock split can bring it into lime light due to news and more investor try to lap it and help make it on higher price. If stock was overvalued before split then it can go down as well.

To avoid sudden share price dip post split, many charts adjust the price of stock with the new price so it does not look that stock has nose dived in the past. After all market capitalization and fundamentals does not change after stock split.