What is a stock split and why do companies do it?

A stock split is a corporate action where a company increases the number of its outstanding shares by issuing additional shares to its existing shareholders while proportionally reducing the share price. The overall value of the company remains the same after the split.

Stock splits are usually done to make the company's shares more accessible and affordable to a broader range of investors. Here's why companies may choose to do stock splits:

1. Increase Liquidity: By increasing the number of shares available, stock splits can enhance the liquidity of the company's stock. More shares in the market mean more trading activity, making it easier for investors to buy and sell shares.

2. Lower Share Price: A lower share price resulting from the stock split can make the company's shares more affordable to individual investors. This potentially attracts new investors who might have been discouraged by a higher share price.

3. Improved Marketability: A lower share price can also make the company's stock more attractive to institutional investors and mutual funds that have minimum share price requirements for investing.

4. Boost Perceived Demand: Stock splits can create a perception of strong demand for the company's stock and may be viewed positively by the market as a signal of confidence from the company's management.

5. Psychological Effect: Some investors perceive a lower share price as a discount, making the stock appear more attractive even though the overall value of their investment remains the same.

6. Corporate Image: Companies may perform stock splits as a means of enhancing their corporate image and visibility in the market.

Typically, stock splits are announced when a company's share price has risen significantly, and the company believes that the higher share price may deter potential investors. The most common stock splits are 2for1, 3for1, or 3for2 splits, but other ratios can also be used.

For example, in a 2for1 stock split, each existing shareholder will receive two shares for every one share they already own. As a result, the share price will be halved, but the total value of the investor's holdings remains unchanged.

It's essential to note that while stock splits can make a company's shares more accessible, they do not directly impact the company's fundamentals or its intrinsic value. The decision to invest in a company should still be based on thorough research and an understanding of its financial health, business prospects, and overall performance in the market.