A stock split is a corporate action where a company divides its existing shares into multiple shares to make the stock more affordable and increase liquidity. The market capitalization remains unchanged, but the number of outstanding shares increases while the face value per share decreases proportionally.
What Happens in a Stock Split?
In a stock split, the face value of the stock is reduced while the number of shares increases in the same ratio. For example, in a 1:5 split, each share with a face value of ₹10 is split into 5 shares with a face value of ₹2 each.
Example: If you own 100 shares of a company that undergoes a 1:5 split, you will now own 500 shares. However, the share price will reduce accordingly to maintain the same investment value.
Examples from NSE & BSE
IRCTC (NSE: IRCTC) split its shares in 2021 from face value ₹10 to ₹2, resulting in a 1:5 split that made the stock more accessible to retail investors.
Pidilite Industries (BSE: 500331) executed a 1:5 split in 2020, improving stock liquidity and participation.
Record Date and Ex-Split Date
To be eligible for the split shares, you must own shares before the record date. The ex-split date is typically one business day prior to the record date. Post split, the stock price adjusts downward to reflect the increased number of shares.
Impact on Share Price
The stock price reduces in the same ratio as the split. However, the overall value of your investment remains unchanged.
If a stock is trading at ₹5,000 and a 1:5 split is declared, the new stock price will adjust to ₹1,000, and the investor will hold 5 times more shares.
Taxation on Split Shares
There is no tax implication when shares are split. The cost of acquisition is adjusted proportionally. If you bought 1 share at ₹1,000, and after a 1:5 split you hold 5 shares, the revised cost of acquisition becomes ₹200 per share.
Impact on Futures and Options (F&O)
- Futures: Lot sizes are revised and contract prices are adjusted proportionally on the ex-split date.
- Options: Both the strike price and market lot are revised to reflect the new structure.
Example: If a stock’s lot size is 300 and it undergoes a 1:3 split, the new lot size becomes 900 while strike prices adjust to one-third.
Why Do Companies Split Shares?
- Improve affordability and appeal to small investors
- Increase liquidity in the market
- Widen the shareholder base
Stock splits are a non-dilutive and investor-friendly action. With ProStocks, stay informed on corporate events like stock splits to make better trading and investment decisions.
Disclaimer: Investments in securities market are subject to market risks. Read all related documents carefully before investing. ProStocks is a SEBI registered stock broker (INZ000048231). This blog is for informational purposes only and does not constitute investment advice.
