Why do companies go for stock splits? A simple guide
If you have been following the stock market, you may have noticed that from time to time, companies announce something called a stock split. This can be confusing if you are new to investing. A stock split happens when a company raises the number of its outstanding shares by dividing its current shares into multiple new ones.
For example, if you own one share priced at ₹1,000 and the company goes for a 1:10 split, you will now own 10 shares priced at ₹100 each. Let’s understand this in detail in today’s blog.
Reasons companies go for a stock split
Here are some of the reasons why companies prefer stock splits.
Share Affordability
Companies split their shares to make the stock price appear more affordable to retail investors. When a stock trades at very high prices, many small investors hesitate to buy. By reducing the price per share through a split, companies encourage participation from a broader investor base without altering the overall market capitalisation.
For example, if the HAL share price trading now around Rs. 4700+ is after the stock split in 2023 in a 2:1 ratio. It created affordability and has now gained value.
Market Liquidity
Stock splits raise the outstanding shares in the market. With many shares available at a lower price, trading activity usually rises.
This higher liquidity provides smoother entry and exit for investors, narrows bid-ask spreads, and enhances overall price discovery. Such improved liquidity often attracts traders and investors looking for easily tradable stocks.
Retail Attraction
Companies use stock splits to attract first-time investors. Lower-priced shares psychologically appeal to new participants who feel comfortable buying multiple units instead of fractional ownership.
For Indian retail investors in particular, owning whole shares carries more appeal than buying fractions, which boosts retail interest and strengthens retail participation in equity markets.
Employee Benefits
Many companies have a provision for employee stock option plans (ESOPs). These companies split shares to make sure they are affordable to their eligible employees.
If the share price is high, it can discourage employee participation in such plans. Stock splits reduce the strike price, making options accessible and motivating employees to participate.
Institutional Interest
Some institutional investors prefer higher liquidity and broader shareholder bases when evaluating stocks. If a company’s share price is unusually high, it can limit the depth of market activity.
By splitting shares, companies make them more liquid, encouraging greater institutional interest and smoother large-volume transactions without causing sharp movements in stock price.
Trading Volume
Stock splits can lead to improved trading volumes because the shares become more accessible at lower prices. Higher trading volumes make the stock more attractive for active traders and investors who rely on frequent buying and selling.
This increased turnover also helps create stronger market depth, improving overall efficiency in trading activity.
Market Visibility
A lower per-share price after a split improves the stock’s visibility among investors. Retail investors scanning markets notice stocks priced in a comfortable range.
By lowering the price, companies increase the likelihood of being included on more watchlists and discussions, which indirectly strengthens investor attention and potential participation in the stock.
Psychological Impact
Even though the value of investment does not change, the psychology of investors often plays a big role in the stock market. Lower-priced shares appear more “affordable” and attractive, even if the fundamentals remain unchanged.
For example, many retail investors find it easier to buy 100 shares at ₹50 each rather than one share at ₹5,000, even though both cost the same.
Stock splits play an important role
Stock splits are corporate actions aimed at making shares more affordable, liquid, and attractive to a wider group of investors. While the upcoming stocks split will not alter the actual value of the company or the investor’s total holdings, it will play an important role in improving participation, marketability, and investor psychology.
