What is a stock split?
In a stock split, a company divides existing shares into multiple shares. As the number of shares increases, the price of the share goes down, but the market capitalisation remains the same. This means the number of shares you hold goes up, while their price comes down. It is similar to splitting an `100 note to two `50 notes.
2. Why does a company opt for a stock split?
The prime intention of a company announcing a stock split is to increase the liquidity in its stock and reduce the price of the share. When a stock runs up sharply, the company would split its shares to lower the denomination. Retail investors perceive that shares with lower prices are less expensive.
3. How does it benefit investors?
For existing investors, the price one gets for each share declines but the total number of shares increases. A stock split may have a sentimental impact on the stock temporarily , but it need not help investors in the long run.
4. What should investors keep in mind?
Analysts advise investors not to blindly buy shares of a company just because the price is lower. This means that a stock need not be cheap just because it is `50 and not `500. Also, if a company keeps opting for the stock split route, it should probably be avoided.
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