11.7 : Stock Split

A stock split is a corporate action aimed at increasing the number of a company's shares by dividing its existing shares into multiple new ones. This adjustment reduces the per-share price without altering the company's overall market capitalization, thereby making shares more affordable to investors and enhancing trading flexibility.

Stock splits are often employed by companies whose stock prices have risen significantly, making their shares less accessible to retail investors. Lowering the per-share price can attract a broader range of investors, potentially increasing demand and liquidity. For instance, retail investors who may have hesitated to purchase high-priced shares might now find them within reach.

Another advantage of stock splits is the psychological effect on market participants. A lower share price often creates a perception of affordability, encouraging investment even though the total market value of the shares remains unchanged. Additionally, stock splits can increase trading activity, as investors may trade in smaller quantities, further improving liquidity.

Stock splits are often viewed as an indication of strong financial performance and growth. Companies that announce stock splits usually have experienced significant share price appreciation, signaling investor confidence in their prospects. However, while a stock split may enhance accessibility, it does not directly impact a company's underlying value or fundamentals.