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What is meant by a Share Split?
Share split is a method of increasing the total outstanding number of shares in the market by decreasing the value of the share in a given proportion.
Share split does not alter the total funds. It only decreases the par value of the shares.
Share split is a matter of dividing the value of the shares in a proportionate manner and it is not a way to increase the value of the share in the market.
Increases the Number of Outstanding Shares
Share split affects the total number of outstanding shares in the market. For example, if stock of price Rs 10 has 1 crore outstanding shares, it can be split into Rs 5 at par for a total of 2 crores of outstanding shares. As is obvious, share split does not change the value of the share. It only increases the number of shares in the market.
Share Split Dilutes the EPS
With a share split, the earnings per share get diluted. As the number of shares goes up, the total value per share goes down, thereby changing the par value of the shares and not the overall value of outstanding share value.
Does Not Affect the Net Wealth of Shareholders
Share split also does not change the net wealth of the shareholders. As the par value is kept in proportion to the original share price, the total net worth of the shareholders remains unchanged for the shareholders. However, if the market price per share goes up, the income from share premiums can increase the net worth of the shareholders.
Makes the Shares More Affordable
Share split may be opted by a company for various reasons. One of them is to increase the accessibility and affordability of the shares for smaller shareholders in the market. When a share is split into a certain number of shares, its prices go down. So, when a large corporate splits its shares, the shares become more affordable for the small investors. It, therefore, increases the trading activities of the share in the market.
Share Split Can Be Reversed
The share split method can also be reversed. It is known as the reverse split of shares. In this case, the par value of the shares increases as two or more shares are bundled into one share. In case of reverse split the number of total outstanding shares goes down. Accordingly, the dividends allowed on shares go up in case of a reverse split.
Conclusion
Companies may split their shares in order to make them more affordable and attractive to the investors. However, like bonus shares, there are some rules and regulations that need to be followed while splitting the shares.
Splitting of shares is a way to increase the total outstanding share so that the dangers associated with uncertainty in future value can be minimized. Therefore, stock splitting is a good measure to improve the dividend policy of companies.
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