What are Stock Splits and what do they mean for investors?

When a company is worried that its shares are trading too high and it needs to boost its liquidity, it resorts to the corporate action called a stock split. A stock split makes it cheaper to buy and sell shares, thereby attracting new investors.

A company enacts a stock split by issuing more shares to its current shareholders while simultaneously reducing the price of each share by the same proportion. This ensures that the value of each shareholder’s stake and the company's overall market capitalisation remain the same, despite an increase in the number of shares outstanding. Hence, a stock split is merely a cosmetic move that does not change the company's fundamentals.

A stock split can create new demand for a highly-priced share by making it more accessible to potential investors. Secondly, it indicates management’s confidence in stock performance and conveys that a company’s share price has increased.