When HDFC Bank, which is the country’s largest private sector lender approved stock-splitting, that is a proposal to split the lenders share from one equity share of face value of Rs 2 each to two shares of face value Rs1 each. Then many people were wondering that what is stock splitting and how is it beneficial for investors and why did the company go that way.

So we will explain you all these things in all you need to know about.

What is Stock-Splitting?

Stock Splitting is a process that either increases or decreases the company’s total number of shares outstanding. But in this entire procedure two things remain the same. One is the company’s market face value and second is proportionate ownership of shareholders. The first and foremost thing that is required to carry this forward is to take advance approval from the company's board of directors. Usually it’s done in a ratio of 2 for1, 3 for 1 or 3 for 2.

For understanding it let’s take an example

Suppose a company has 500 crore outstanding shares of Rs 20 face value and it announced a split to Rs 5 face value per share. Therefore, one share of face value Rs 20 will become 5 shares of Rs 4 face value. A person holding 200 shares of the company will have 1,000 shares after the stock split.

Why Stock –Splits?

The main objective behind going for stock splitting is to increase the liquidity and with increased liquidity more buyers and sellers trade in the stock. If a company's price per share is too high, buying that stock becomes a riskier prospect because it's harder to offload shares that cost more money. If the price per share goes down, however, the shares can be more easily liquidated.

By reducing the prices of shares the company want to attract the investors as high price shares have very less chances to be sold off and it’s very difficult to off load high prices shares considering the risk factor involved in it. And if the prices per share goes down then the shares get more easily liquidated. When a stock becomes affordable and is perceived as less risky, then the demand for the stock could increase.

What is Reverse Stock-Splitting?

Reverse stock split is opposite to stock splitting. Where as in stock splitting the prices of the shares goes down, on the other hand in reverse splitting it goes up. And the total number of company’s outstanding shares decreases while in stock splitting the company’s outstanding shares increases.

How it Impacts Companies Share Values After this?

Many experts are of the opinion that the slice of the cake is not going to make the actual size of cake bigger. However, the value of shares depends on the fundamentals of the company and the state of the market. And past precedents have shown that after stock splitting the shares of the company can go in either direction. So invest after having a look at the company’s fundamentals.