Tata Steel is splitting each of its shares into 10. But why?

When you open your phone on July 28, 2022 and see that the price of Tata Steel has been reduced by more than 10 times, do not be shocked. This is what is legally expected to happen when a company announces a stock split. 

In May 2022, the board of directors of Tata Steel decided to split its shares in a ratio of 1:10 ie splitting each share with a face value of Rs 10 into 10 shares having a face value of Re 1. The stock split will happen on July 28. 

What exactly happens in a share split: If a company splits its 1 share into 10, the number of shares increases 10 times and the market price reduces 10 times.

For eg: Say Tata Steel has a total of 100 shares with a face value of Rs 10 and each share trades on the stock market at Rs 950 on July 27, 2022. Thus the market capitalization of this company is Rs 95,000 (100 shares* Rs 950). 

Now when a share split usually happens:

• The number of shares increases in multiples as per the ratio.
• The face value of each share reduces.
• The market price of each share decreases in multiples as per the ratio. 

But this works out in a way so that the market capitalization of a company remains constant. So, when Tata Steel splits its shares on July 28, here's what you can expect: 

• Number of shares will increase to 1000 from 100 (multiply existing shares by 10).
• The face value of each share reduces to Re 1 from Rs 10 (divide the existing face value by 10).
• The market price of each share reduces to Rs 95 from Rs 950 (divide the existing market price by 10) 

Now, post the share split, the market capitalization will still remain Rs 95,000 (1000 shares * 95)

Say Tata's share price on July 27 is Rs 1000, then its share price on July 28 will open at Rs 100 (ie. Rs 1000/10)  

What if I hold 1 share of Tata Steel? Say you bought 1 share of Tata Steel in May 2022 for Rs 950. On July 28, your portfolio will have 10 shares of Tata Steel, but each share will now be worth Rs 95 only. 

But why the split? Tata wants to split its shares because it wants to enhance liquidity in the market, widen its shareholder base and make its shares more affordable to small investors.

How? As the price reduces by 10 times post the stock split, the stock will now seem more affordable to a wider number of people who want to invest in good companies like Tata. This will lead more people to trade in the stock and thus drive the stock price and cause trade volumes to increase. As the price increases, this will indicate to an even larger audience that they should buy more of these shares, which will again push the price.      

Do you hold shares of Tata Steel?