What is a stock split and how does it affect the stock price and the company

A stock split is a corporate action where a company divides its existing shares into multiple shares. This results in an increase in the total number of outstanding shares while proportionally decreasing the price per share. The primary impact of a stock split on the stock price is a reduction, as the number of shares outstanding increases, diluting the value of each share. However, the overall market capitalization and the value of shareholders' stakes remain the same.

1. Stock Price Impact: The stock price decreases proportionally to the split ratio. For example, a 2-for-1 stock split would halve the price per share, and a 3-for-1 split would reduce it by about 33.33%.
2. Company's Market Capitalization: The company's market capitalization, which is the total value of its outstanding shares, remains unchanged because the value of each share decreases in line with the increase in the number of shares.
3. Shareholder Value: The value of shareholders' stakes remains the same because the total value of their investment remains constant. For instance, if a shareholder previously owned 100 shares at $100 per share, after a 2-for-1 stock split, they will own 200 shares at $50 per share, with the same total value of $10,000.
4. Liquidity and Investor Perception: Stock splits are often employed to make shares more affordable and increase liquidity. They can also improve the stock's marketability by making it more accessible to a broader range of investors, which may lead to increased trading activity.
5. Market Efficiency: The semi-strong form of market efficiency suggests that stock split announcements have no impact on a company's stock price, as the market adjusts to the news immediately.

In conclusion, while a stock split does not change the intrinsic value of a company, it can affect the stock price, liquidity, and investor perception. Companies may opt for stock splits to address concerns about high or low share prices, maintain listing requirements on exchanges, or to boost investor confidence and attractiveness.