What Makes A Stock Share Split?

A stock split is a technique that is employed by many organizations in the normal course of activities in the capital market. An example of a stock split is given illustrated for your benefit:

Company XYZ has a market capitalization of U.S. $100 million. The face value of the share is U.S. $10 each. The current market price of each share is U.S. $100 each. This means that there are 1 million shares outstanding in the market. $100 million = $100*1million.

Mr. Watson holds 1000 shares of XYZ. His total net worth in terms of XYZ is $1 million. This is true because 1 million = 1000*$100.

Now the company chooses to opt for a stock split. In this case the ration for the split happens to be 1:2. The face value of the share falls to $5. The current market price falls to $50. The number of outstanding shares in the market moves up to 2 million. The net worth of Watson remains the same but the number of shares that he possesses doubles.