A stock split is a corporate action that increases the number of shares a company has in circulation while proportionally reducing the price per share. Despite this change in share count and price, the company's overall market capitalisation remains the same. Companies typically initiate stock splits to improve liquidity, make shares more affordable, and attract a broader investor base.
Stock splits are common in various industries, including semiconductor stocks, where companies experience rapid growth and rising stock prices. Investors often view stock splits as a positive sign, as they indicate strong financial performance and a company's confidence in future growth. This article explores what a stock split means, how it works, and its impact on shareholders.

What is a stock split?

A stock split is when a company divides its existing shares into multiple new shares while maintaining the same total market value. The most common type of stock split is a 2-for-1 split, where each existing share is split into two new shares, effectively halving the share price.
For example, if an investor holds 100 shares of a company trading at Rs. 1,000 per share and the company announces a 2-for-1 stock split, the investor will now own 200 shares, but the price per share will be Rs. 500. The total value of the investment remains the same at Rs. 1,00,000.
Companies conduct stock splits to make shares more accessible to retail investors and improve market liquidity.

Types of stock splits

1. Forward stock split

A forward stock split increases the number of shares while reducing the price per share. Common ratios include:
● 2-for-1 (each share is split into two)
● 3-for-1 (each share is split into three)
● 5-for-1 (each share is split into five)
This type of split is generally seen as a bullish signal, as it often follows strong financial performance and rising stock prices.

2. Reverse stock split

A reverse stock split reduces the number of outstanding shares while increasing the share price. Common ratios include:
● 1-for-2 (two shares are combined into one)
● 1-for-5 (five shares are combined into one)
● 1-for-10 (ten shares are combined into one)
Companies typically conduct reverse stock splits to maintain stock exchange listing requirements or improve the perception of their stock price.

Why do companies announce stock splits?

1. Improve liquidity

High-priced stocks may have lower trading volumes. By reducing the price per share, a stock split increases trading activity and liquidity, making it easier for investors to buy and sell shares.

2. Attract retail investors

When stock prices rise significantly, they may become unaffordable for small investors. A stock split makes shares more accessible to a larger pool of investors, boosting demand.

3. Maintain psychological affordability

Investors often perceive stocks with lower prices as more attractive. Even though the company’s value remains unchanged, a lower stock price can create the impression that the stock is more affordable.

4. Indicate company confidence

A stock split signals that management expects continued growth and strong performance. It reassures investors that the company is in a solid financial position.

How does a stock split affect shareholders?

1. No change in investment value

A stock split does not impact the total value of an investor’s holdings. While the number of shares increases, the price per share decreases proportionally, maintaining the overall investment value.

2. Increased liquidity and trading volume

Post-split, the lower stock price often attracts more buyers, increasing trading volume. This can lead to better price stability and reduced bid-ask spreads.

3. Potential for future gains

Stocks that undergo splits often continue their upward momentum. While a stock split itself does not guarantee higher returns, companies that split their stock tend to have strong growth potential.

4. Dividend adjustments

For dividend-paying companies, the dividend per share may be adjusted to reflect the split. However, the total dividend payout remains unchanged for existing shareholders.

5. Market perception and investor sentiment

A stock split is often viewed as a positive indicator, leading to increased investor confidence. Stocks that split tend to attract more retail investors, which may result in higher demand and price appreciation.

Stock splits in semiconductor stocks

Semiconductor stocks have witnessed strong growth in recent years due to increasing demand for chips in AI, 5G, electric vehicles, and consumer electronics. Many semiconductor companies have announced stock splits to keep their shares affordable and attract new investors.
For example, major global semiconductor firms like NVIDIA, Texas Instruments, and Taiwan Semiconductor Manufacturing Company (TSMC) have conducted stock splits in the past to maintain liquidity and expand their investor base. Indian semiconductor companies may also adopt stock splits as they grow and scale their operations.

Should you invest in stocks that split?

1. Evaluate company fundamentals

Before investing in a stock that has split, assess the company’s fundamentals, including revenue growth, profitability, and future prospects. A stock split alone does not determine a company’s value.

2. Look at historical performance

Companies with a history of stock splits and consistent growth are generally strong investment candidates. Past splits often indicate that management expects continued success.

3. Consider market trends

Investors should analyse overall market trends, sector performance, and economic conditions before investing in a split stock. Semiconductor stocks, for instance, are influenced by technological advancements and global demand.

4. Avoid speculative trading

While stock splits create excitement, avoid investing based purely on hype. Conduct thorough research and ensure the stock aligns with your long-term investment strategy.

Conclusion

A stock split is a strategic move by companies to improve liquidity, attract investors, and signal confidence in future growth. While stock splits do not change the intrinsic value of a company, they can create positive market sentiment and increase trading activity.
Semiconductor stocks, known for rapid growth and innovation, often announce stock splits to keep their shares accessible to a wider range of investors. For long-term investors, stock splits can present new opportunities, but it is essential to assess company fundamentals and market trends before making investment decisions.
By understanding how stock splits work and their impact on shareholders, investors can make informed choices and leverage these opportunities for portfolio growth.