What are stock splits and how do they impact the value of my shares?

Stock splits are a corporate action in which a company increases the number of its outstanding shares by dividing its existing shares into multiple shares. The primary objective of a stock split is to lower the share price and make the stock more affordable for individual investors. Let's understand how stock splits work and their impact on the value of your shares:

How Stock Splits Work:
Stock splits are usually expressed as a ratio, such as 2for1, 3for1, or 5for1. For example, in a 2for1 stock split, for every share you own, you will receive two shares.
The total value of your investment remains the same after the split. However, the number of shares you own will increase proportionally, and the price per share will decrease.

Impact on Share Value:
Stock splits do not change the fundamental value of a company. They are more like a cosmetic change to make the stock price more appealing to retail investors.
Since the number of outstanding shares increases, the share price is divided by the split ratio. For example, in a 2for1 split, if a stock was trading at $100 per share before the split, after the split, it would trade at $50 per share.
The market capitalization of the company remains the same. Market capitalization is calculated by multiplying the share price by the total number of shares outstanding.

Impact on Shareholders:
Stock splits have no direct impact on the wealth of shareholders. If you own one share before the split, you will own more shares after the split, but the total value of your investment remains unchanged.
Stock splits are generally seen as positive signals by investors. They often indicate that a company's board and management are confident about the future performance and growth prospects.

Liquidity and Trading Volume:
Stock splits can increase the liquidity and trading volume of a company's stock. With a lower share price, more investors may be willing to buy the stock, resulting in increased trading activity.

Psychological Impact:
Lower share prices after a split can attract more individual investors who may find the stock more affordable.
Stock splits can create a positive perception among investors, leading to increased interest in the company's stock.

It's important to note that while stock splits can impact the perceived affordability of a stock, they do not change the underlying value of the company. Therefore, the decision to invest in a company should be based on a thorough analysis of its financials, growth prospects, and overall performance.