“When a company declares a stock split, the number of shares of that company increases, but the market cap remains the same. Existing shares split, but the underlying value remains the same.” Describe stock split and split of shares by a company.
Generated by claude-sonnet-4-6 · 2026-06-15 07:08 · grounding rag
Model Answer
Stock Split is a corporate action in which a company divides its existing shares into multiple shares. For example, in a 2-for-1 split, each existing share becomes two shares, and the share price is halved proportionately.
Key features of a stock split:
- The total number of shares increases, but the market capitalisation remains the same.
- The face value (par value) of each share decreases proportionately.
- Existing shareholders hold more shares, but the underlying value of their investment does not change.
- Companies typically do this to make shares more affordable and liquid for small investors, thereby increasing market participation.
Example: If a company has 1,00,000 shares at ₹100 each (market cap = ₹1 crore), after a 2-for-1 split, it has 2,00,000 shares at ₹50 each (market cap still = ₹1 crore).
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Explanation
- This is a competency-based question testing application of financial concepts; the examiner expects you to define stock split and explain its mechanics with at least one feature or example.
- Key examiner checklist: definition ✓, number of shares increases ✓, market cap unchanged ✓, face value/price adjusts proportionately ✓.
- The source passages cover securities markets broadly but do not detail stock splits — so apply your standard Class 10 Financial Literacy/Markets knowledge here.
- Avoid writing an essay; 4 crisp points + a brief example is ideal for 4 marks.