Stock split refers to increase in number of shares of a company which are outstanding in the open market in the hands of public. Stock split results in increase in number of shares but decrease in share price which results in market capitalization keeping remain the same as it was before the stock split. Given below are some of the advantages of stock split –
- It results in share price coming down which in turn results in stock price getting attractive for retail investors. Consider an example where there are 2 companies A and B having same fundamentals and if the price of A is $100 and B is $10 than a normal would buy 1000 shares of A rather than buying 100 shares of company B.
- It also increases the liquidity for a stock because after stock split number of shares which are there in open market increases and It leads to better price discovery because in market liquidity plays a key role when it comes to discovery of correct price.
- In the minds of investors it gives them immense satisfaction because after the split the number of shares in their online trading account becomes double or even triple. Though there is no rationality behind it but market and market participants does not always act rationally.
- Stock split can also result in the increase in the stock price, which many happens normally after the announcement is made.