Introduction:

A stock split or stock divide increases the number of shares in a public company. The price is
adjusted such that the before and after market capitalization of the company remains the same
and dilution does not occur. Options and warrants are included.

An increase in the number of outstanding shares of a company's stock, such that

proportionate equity of each shareholder remains the same. This requires approval from the
Board of Directors and shareholders. A corporation whose stock is performing well may
choose to split its shares, distributing additional shares to existing shareholders. The most
common stock split is two-for-one, in which each share becomes two shares. The price per
share immediately adjusts to reflect the stock split, since buyers and sellers of the stock all
know about the stock split. Some companies decide to split their stock if the price of the stock
rises significantly and is perceived to be too expensive for small investors to afford.

All publicly-traded companies have a set number of shares that are outstanding on the stock
market. A stock split is a decision by the company's board of directors to increase the number
of shares that are outstanding by issuing more shares to current shareholders. For example, in
a 2-for-1 stock split, every shareholder with one stock is given an additional share. So, if a
company had 10 lakh shares outstanding before the split, it will have 20 lakh shares
outstanding after a 2-for-1 split. 

A stock's price is also affected by a stock split. After a split, the stock price will be reduced
since the number of shares outstanding has increased. In the example of a 2-for-1 split, the
share price will be halved. Thus, although the number of outstanding shares and the stock
price change, the market capitalization remains constant.

A stock split is usually done by companies that have seen their share price increase to levels
that are either too high or are beyond the price levels of similar companies in their sector. The
primary motive is to make shares seem more affordable to small investors even though the
underlying value of the company has not changed.
Another version of a stock split is the reverse split. This procedure is typically used by
companies with low share prices that would like to increase these prices to either gain more
respectability in the market or to prevent the company from being delisted (many stock
exchanges will delist stocks if they fall below a certain price per share). For example, in a
reverse 5-for-1 split, 10 lakh outstanding shares at Rs.50 each would now become two
million shares outstanding at Rs.250 per share. In both cases, the company is worth Rs50
lakh.

The bottom line is a stock split is used primarily by companies that have seen their share
prices increase substantially and although the number of outstanding shares increases
and price per share decreases, the market capitalization (and the value of the company) does
not change. As a result, stock splits help make shares more affordable to small investors and
provides greater marketability and liquidity in the market.

Factors and Reasons for Stock Splits:

There are several reasons companies consider carrying out this corporate action.

The first reason is psychology. As the price of a stock gets higher and higher, some investors
may feel the price is too high for them to buy, or small investors may feel it is unaffordable.
Splitting the stock brings the share price down to a more "attractive" level. The effect here is
purely psychological. The actual value of the stock doesn't change one bit, but the lower
stock price may affect the way the stock is perceived and therefore entice new investors.
Splitting the stock also gives existing shareholders the feeling that they suddenly have more
shares than they did before, and of course, if the prices rises, they have more stock to trade.

Another reason, and arguably a more logical one, for splitting a stock is to increase a stock's
liquidity, which increases with the stock's number of outstanding shares. By splitting shares a
lower bid/ask spread is often achieved, thereby increasing liquidity.