The process of dividing the outstanding shares into further smaller shares is known as stock splits.
In this the market value of the total outstanding shares of a company remains the same but market value of a single share is reduced in proportion to the no of shares extracted out of a single share. For example: Suppose there is a stock whose market value per stock is Rs.2,000 and a company decides for a stock split into 10 shares, then each share will have a market value of Rs.200.
Will I Incur a loss?
No, as quoted earlier the total market value of the outstanding shares remains the same. Considering the above example: Mr. John has a stock of Company X with a market value of Rs. 2,000 per share & the company decides to split the stock into 10 shares then each share will have a market value of Rs.200. Mr. John will have now 10 shares into his portfolio with Market Value of Rs. 200 each, thus equaling his portfolio value of Rs. 2,000 again.
Why does a Company do a Stock Split?
A company goes for a stock split, when it finds that the liquidity of its stock in the market is very less due to high value of its stock in the market is very less due to high value of the stock. An average investor generally doesn’t not prefer trading in a highly valued stock and lowering the stock value helps increasing the stock liquidity.
Similarly, reverse of the stock split can also be done by the company that is cumulating a no of stocks into one. This is known as reverse stock split. Reverse stock split is usually done in cases when the stock price of a company is very low.