A stock split will usually cause a big shift in the market when it is announced. Especially for popular stocks like Tesla and Apple. These high profile companies make news every day. In some cases, news of a split can cause a shift in the market. Still, what is a stock split? What does it do for you?
A stock split(also called a Forward Stock Split) happens when a company divides the existing shares into multiple new shares to boost the stocks liquidity. The number of shares increases, but the total dollar value does not change compared to the value before the split. This is because the split does not add any real value. The most common examples of a split are a 2 for 1 or 3 for 1. This means the stockholder on record will receive 2 or 3 shares respectively, for every 1 share held by an earlier date.
Why Stock Splits?
Companies usually choose to split their shares to lower the trading price of the stock to a more popular trading price. Even though the overall value does not change, it brings the individual share price down. This makes the company more attractive to smaller retail investors that might have been priced out of the stock at the higher price before the split. Hopefully, retail investors will buy the stock at the lower price and the stock starts its rise back up.
Reverse Split
Another type of stock split is called a Reverse Split. The company that issues a reverse split decreases the number of its outstanding shares and increases the share price. Like a forward stock split, the market value of the company after a reverse split does not change. A company that takes this corporate action might do so if its share price had decreased to a level at which it runs the risk of being delisted from an exchange for not meeting the minimum price required to be listed.
Conclusion
A stock split can be exciting, the idea of having more shares is a good one. It is important to remember that the overall value does not change. The benefit of having more shares comes after the split takes place. If small retail investors are attracted to the lower price, then they will buy increasing demand and the value of the stock. Still, that is a big if depending on the company and the share price.
If you want to know more about investing and how to get into the market, see my post “Thinking about Investing? 5 Tips to get you started”. @ advanceyourday.com