A significant surge in the prices of certain stocks often makes them feel “expensive” for retail investors, causing many beginners to hesitate before investing. To address this issue, many listed companies implement a stock split as a strategy to make share prices more affordable without changing the company’s overall value.

To better understand this strategy, let’s explore what a stock split is and how it affects investors.

Definition of a Stock Split

A stock split is a corporate action in which a company divides one existing share into multiple new shares. The primary objective is to make the price per share more affordable without altering the company’s total market value.

When a stock split occurs, the price per share decreases while the number of shares owned by investors increases. However, the total value of the investment remains the same and is not affected.

How a Stock Split Works

Companies typically use ratios such as 2:1, 1:5, or 1:10 to determine the number of new shares issued. These ratios indicate that each existing share will be split into several new shares.

For example, if you own 1 share priced at Rp 10,000 and the company conducts a 1:5 stock split, the calculation would be as follows:

• Number of new shares → 1 × 5 = 5 shares
• New share price → Rp 10,000 ÷ 5 = Rp 2,000

The total value remains Rp 10,000. Only the number of shares increases and the price per share becomes lower. The split shares are automatically credited to the investor’s portfolio, so no additional action is required.

Objectives of a Stock Split

It is important for beginner investors to understand why companies conduct stock splits. The main objectives include:

1. Making Share Prices More Affordable

One of the primary reasons is to reduce the price per share, making it more accessible to retail investors. With a lower price, shares appear more reasonable to buy, allowing more investors to participate.

2. Increasing Trading Liquidity

Lower-priced shares tend to encourage higher trading activity. The more investors buy and sell the stock, the higher its liquidity, which helps stabilize prices and makes it easier for investors to enter or exit positions.

3. Expanding the Investor Base

Companies can attract new investors who were previously reluctant to invest due to high share prices. With more potential buyers, the stock becomes more popular and gains stronger appeal in the market.

The Impact of a Stock Split on Investors

In general, a stock split has several effects on an investor’s portfolio and investment process:

1. More Shares, Same Total Value

When a stock split occurs, the number of shares you own increases according to the split ratio, but the total value of your holdings remains unchanged. It is similar to cutting a cake into more pieces. There are more slices, but the size of the cake stays the same.

2. Lower Share Price

Because the price per share decreases, split shares appear more affordable to new investors, particularly retail investors. Many people feel more comfortable buying stocks at lower nominal prices, which increases accessibility.

3. No Impact on Company Fundamentals

It is important to emphasize that a stock split does not affect a company’s performance or fundamentals. Earnings, revenue, business prospects, and management remain exactly the same as before.

Start Investing with Greater Confidence

A stock split makes shares more accessible and improves liquidity without changing a company’s value. However, investment decisions should always be based on fundamentals, not merely on lower-looking prices.

If you want to invest with the right approach, now is the perfect time to take action. Open an investment account with Growin’ by Mandiri Sekuritas, explore various  financial products, and start building a healthy portfolio today. Begin your investment journey now.