Explained: The concept of stock split and reverse stock split

A split increases the number of shares while decreasing the face value of the investment but the total value remains the same.

A stock split is a corporate action in which a company increases the number of shares by lowering the stock's face value. Companies usually split shares to increase liquidity because the stock price drops after the split. A split increases the number of shares while decreasing the face value of the investment but the total value remains the same. Within a week, the split shares will be credited.  

Example: Say if the stock’s face value is ₹10 and there is a stock split in the ratio of 2:1, then the face value will change to ₹5. If you owned 1 share of ₹10 before the split, you would now own 2 shares of ₹5 after the split.  

Even if a stock split doesn't affect the net worth of an existing shareholder's stock, current shareholders may benefit from the new level of demand that arises when additional investors buy the more affordable shares. As new investors buy shares, the share price would probably rise once more. In the long run, present shareholders might experience some possible value improvements, even if they are just brief.  

It is important to understand that only the share price and the number of shares change after a stock split. The value of each shareholder’s stake and market capitalization remains unchanged.  

The reverse stock split, which lowers the number of shares outstanding by correspondingly raising the share price, is the opposite of a stock split. For example, a 1-for-2 reverse stock split would give you one share for every two shares you possess while leaving the value of your position constant. This is a less typical corporate move which is usually made to help the firm remain listed on an exchange when its share price goes below the statutory minimum.