Everything you need to know about stock splits (2024)

Shares of IRB Infrastructure underwent a stock-split this week. The firm had approved a 1:10 stock split. Shares of two other firms—Shreeji Translogistics and KCD Industries India— also started trading after a stock-split last week earlier this year.

What stock-split implies

A stock-split happens when a company issues more shares to its existing shareholders by reducing the face value per share. This is done at a specified ratio.

For example, a split ratio of 1:2 for a share with a face value of ₹10 implies that for every one share held, a shareholder gets two shares, each with a face value of ₹5. After a split, the stock starts trading at the adjusted price. In this example, if the share price was ₹900, then it would fall to ₹450 (1:2 ratio) immediately after the split. Beyond the immediate impact, the price of the stock may actually go up if there is higher demand for it.

In the case of IRB Infrastructure, its stock closed at ₹297.85 apiece on 21 February. After the stock split on 22 February, it was trading higher than ₹29.785 apiece (one-tenth the price), and closed the day at ₹34.20.

At a broader level, a stock split does not impact a company’s market capitalization as the number of outstanding shares goes up along with the price per share going down- both by the same proportion.

Dates to note

Until very recently, there were two different dates to take note of in the context of a stock split. One, the record date—the cut-off date based on which the company decides which shareholders are eligible for the stock split. Two, the ex-date, on which the stock starts trading at the post-split price. The ex-date would be one day before the record day. However, with the Indian stock market moving completely to the T+1 (trade+ 1) settlement cycle from 27 January, both the record date and the ex-date are now the same date.

To be eligible for a stock split, one must buy the shares of that company at least one day (earlier it was two days) before the record date.

So, why does a company go for a stock split? Since the price of a stock falls after a split, it makes the stock more affordable for investors. Also, a larger number of shares available at a lower price implies improved liquidity in that stock. The stock split will have no impact on the market value of your existing investment in that stock.

Note that, sometimes companies also do a reverse split— which is what the name suggests—the reverse of a stock split. That is, in this case, a company reduces the number of outstanding shares by raising the face value of each share.

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