What is a stock split?

A stock split is when a company divides its existing shares into multiple shares, reducing the price per share while keeping your total investment value unchanged. Think of it like exchanging a ₹2,000 note for ten ₹200 notes. You have more pieces, but the same total value.

How does a stock split work?

Here's what a 1:5 stock split looks like:

Before the split, you held 10 shares at ₹1,000 each. After a 1:5 split, you now hold 50 shares at ₹200 each. Your total investment remains ₹10,000. You gain or lose nothing.

Why do companies split their stocks?

• Accessibility: When share prices rise too high, many retail investors find them unaffordable, which reduces overall participation. A stock split makes shares more accessible and improves liquidity. For example, in 2023, Nestlé India announced a 1:10 split, reducing its share price from around ₹20,000 to ₹2,000.
• Signal confidence: A split can indicate that the company feels optimistic about its performance and wants to encourage more participation.
• Investor perception: A share priced at ₹1,500 feels more approachable than one at ₹15,000, even if both companies have identical fundamentals.

What changes in a stock split?

• The number of shares you hold increases: If you held 10 shares and the company announces a 1:2 split, you will now have 20 shares.
• Face value changes: The nominal value on paper reduces proportionally. If the face value was ₹10 before a 1:2 split, it becomes ₹5 after. This mainly serves accounting and regulatory purposes.
• Price per share decreases: In a 1:2 split, the price reduces by 50%. The price drops, but since you hold more shares, your total investment value stays unchanged.

What doesn't change?

• Your total investment value: If your investment was worth ₹1 lakh before the split, it remains ₹1 lakh after.
• Company fundamentals: Metrics like earnings, revenue, and business model remain unchanged. While earnings per share adjust, the P/E ratio stays the same because both price and earnings adjust proportionally.
• Market capitalisation: Since the share price drops but the number of shares increases, the company's total value remains unchanged.
• Your tax liability: A stock split is not a taxable event. You don't pay tax when shares split. Capital gains tax only applies when you sell.

Key dates to remember

• Record date: The company checks its books to identify eligible shareholders. You must hold shares in your demat account on this date. Due to the T+1 settlement cycle, you must buy shares at least one trading day before the record date to qualify.
• Ex-split date: From this day onwards, the stock trades at the new, reduced price.
• Credit date: The company credits new shares to your demat account, typically one to two business days after the record date.

What will you notice in your account?

On the ex-split date, you might see the stock price drop sharply. If a stock was trading at ₹1,000 and splits 1:2, the price drops to ₹500. If you held 10 shares, your portfolio shows 10 shares × ₹500 = ₹5,000. The company will credit the additional 10 shares soon, bringing your total back to ₹10,000. Think of it like a cheque deduction before money arrives. The system is just catching up.

Checking corporate actions: On Kite, if a stock is in your marketwatch, you will see an event tag. Tap on the stock, scroll to Fundamentals, then tap Events to view stock splits and other corporate actions.

Things to keep in mind

• You don't need to do anything. The split happens automatically. If you hold the stock on the record date, the company will credit new shares to your demat account.
• You don't gain extra value. A split doesn't increase your investment's total value. You just receive more shares at a lower price.
• Don't buy just because of the split. Splits can boost participation, but fundamentals remain the same. Don't buy a stock just because it appears cheaper. Evaluate it like any other investment.
• Face value changes, not fundamentals. The share's face value reduces, but the company's fundamentals and financials remain unchanged.
• You can sell only credited shares. If you had 100 shares before a 1:2 split, your demat may still show only 100 shares for a day or two. You can sell those 100, but you must wait for the company to credit the additional 100 before selling those.

To learn more about stock splits and other corporate actions, visit Corporate actions and impact on stock prices module on Varsity by Zerodha.