Stock split

Table of Contents

Stock split
What is a stock split?
Understanding a stock split
How does a stock split work?
Advantages of a stock split
Disadvantages of a stock split
Frequently Asked Questions

Stock split

There is a standard number of shares of stock in each publicly listed corporation that is distributed to investors. The decision to raise the number of outstanding shares by a particular multiple is known as a stock split. For a variety of reasons, businesses divide their stock in a variety of ways.

What is a stock split?

When a company’s board of directors distributes more shares of its stock to its existing shareholders without reducing the value of their stakes, this is known as a stock split.

During a stock split, more shares become available while each share’s value decreases. Notwithstanding changes in the number of shares outstanding, the company’s total market capitalisation and the value of each shareholder’s stake remain constant. The total value stays the same even though more shares are distributed to owners because the share price will likewise fall. The best way to picture a stock split is to imagine it as creating more pizza slices. The pizza is the same size, but there are more slices.

Understanding a stock split

A stock split makes the stock more accessible to more investors, which can be utilised to attract new investors who would not have been eager to buy the stock at its higher, pre-split price or who were unable to do so.

The move is an effective tactic when a company’s stock price increases to a point where many investors are priced out, or when the price has increased much more than the stock of its rivals. Splitting stock can be a good and significant step for businesses aiming to attract new investors. This is particularly valid for companies that are growing swiftly.

A company that is expanding may opt to split its stock, signalling to investors that the company is growing.

How does a stock split work?

To lower the trading price of its stock to a range that is more comfortable for the majority of investors, and to increase the liquidity of trading in its shares, a stock split involves a general increase in the number of shares outstanding based on the proportion of shares that each shareholder previously owned. Businesses regularly choose stock splits.

Also, investors feel more at ease investing in, let’s say, 100 shares of a US$10 stock rather than 1 share of a US$1,000 stock. Due to this, many publicly traded corporations announce a stock split to lower the share price after a significant increase. As a stock split does not improve the company’s worth, even when the number of shares is up, the total dollar value of the shares stays the same compared to pre-split quantities.

Advantages of a stock split

The advantages of a stock split are:

New investors may become interested in the company due to the stock’s enhanced affordability following the stock split.

Following the stock split, investors can buy more shares of the stock because they are now less expensive.
More flexibility and liquidity for trading the shares benefit current investors. Also, investors have the option of selling some shares while holding others.

Disadvantages of a stock split

The disadvantages of a stock split are:

Stock splits are expensive. The business will frequently pay a bank a fee to help with the stock split.

Splitting stocks doesn’t draw the correct kind of investor. Businesses desire reputable buyers for their stocks and those who intend to hold them for a long time.
The fundamentals of the company are unaffected by stock splits. The price per share decreases when a

Frequently Asked Questions

What happens when there is a stock split?

When a stock splits, it means extra shares for stockholders of record at a proportional price reduction. In a conventional 2:1 stock split, for example, if you had 100 shares trading for US$50 before the split, you would now own 200 shares for US$25 each.

What is the difference between stock splits and reverse stock splits?

A stock split is when a corporation divides its existing shares into multiple shares to make them more affordable for investors. A reverse stock split is when a corporation consolidates its shares into fewer shares, typically to make them more valuable.

The primary difference is that a stock split results in a rise in outstanding shares, whereas a reverse stock split results in a decrease in outstanding shares. Retained earnings and total stockholders’ equity are unaffected by either event.

Stock splits are usually done when a company’s stock price has become too high and is seen as being out of reach for potential investors. A reverse stock split is usually done when a company’s stock price has become too low and is at risk of being delisted from exchanges.

Are stock splits good or bad?

Even though a stock split doesn’t affect the value of your investment, it’s typically a good development for investors. It indicates that the business is confident and intends to seek more funding.

Does the stock split make the company more or less valuable?

Stock splits can boost trading liquidity while making the stock’s price appear lower. The market capitalisation and value of the firm are unaffected by a stock split, but the number of outstanding shares increases and the share price falls in proportion.

What is the adjustment of the future and options contract due to a stock split?

When a stock split alters the price of an option’s underlying security, the contract is changed to ensure that the option’s value is unaffected by any price changes resulting from the split.

The terms of a future or options contract are typically adjusted in the event of a stock split, with the number of shares underlying the contract being multiplied by the ratio of the split.

For example, if a company’s stock splits 2-for-1, the number of shares underlying a future or options contract would double. The contract price would also be adjusted, halving the price per share in the case of a 2-for-1 split.