What Is a Share Split?

A share split is when a company divides its existing shares into multiple shares. The number of existing shares will increase but the total value of the shares will remain the same. Examples of common ratios for splits are 2 for 1 or 3 for 1 which means that the shareholder will have two or three shares for every share held.

Example

A company has 100,000 shares priced at Ksh50 each. The market capitalization will be 100,000*50= Ksh5,000,000.

If the company decides to split its shares in the ratio of 2 for 1, this will mean that;

The new number of shares = 100,000*2= 200000

The price of each share = 50/2= Ksh25

The total value of the shares = 200000*25 = Kshs 5,000,000

Therefore the number of shares has increased to 200,000 but the market capitalization remains the same at Kshs 5,000,000.

Reasons for Share Split

1. Share price is too high

When the company’s share price is too high, few people trade it in the market because of its high price. The share split will increase the number of shares and reduce the share price hence making the share affordable to more investors.

2. Liquidity

A share split will increase the number of shares available in the market and the reduced price will make it easier for investors to buy and sell shares.