Listed firms engage in a variety of corporate actions in the course of their daily operations. Dividend distribution, bonus share issuance, and stock splits are all examples of corporate activity. Dividend distribution is the most common and widely employed method by businesses; stock splits, on the other hand, are uncommon.
A stock split might be used by a firm if it is concerned that its share price is too high or too low. A stock split can help a firm lower its share price in order to attract new investors. Let us understand it briefly.
What is a Stock Split?
A stock split occurs when a company's board of directors releases additional shares of stock to existing owners without diluting their stakes' value. A stock split increases the number of outstanding shares while lowering the value of each share individually. While the number of outstanding shares changes, the company's overall market capitalization and the value of each shareholder's stake stay constant.
Bonus shares are frequently confused with stock splits. Bonus share distribution only affects the company's issued share capital, but a stock split affects the company's authorised share capital.
Why do companies opt for stock splits?
One of the main reasons why firms opt to divide shares is because of high share prices. Investor demand can be dampened when a company's share price climbs dramatically.
Another of the key stock split advantages is that a company's shares often have more liquidity. Since shares have become more accessible to regular investors, there will be more demand for them, resulting in higher liquidity in the market. After a stock split, buying and selling shares will be much easier.
A stock split doesn't have a significant influence on a company's existing shareholders. The main impact of a stock split is on investors who are watching a stock and expecting to buy a full share at a lower price. A stock split can be a potent stimulus for those investors who have been sitting on the sidelines.
