What Is a Stock Split?

Aug 07, 2022 By Triston Martin

For a company to be listed on a stock exchange, a specific number of shares must be issued and outstanding. There are many different ways to split stocks, but the most common method is a board of director's decision to issue new shares to present shareholders.

Stockholders acquire an additional share for each share they own in a two-for-one stock split. After the break, there will be a total of 20 million shares in the corporation if it had 10 million before the split.

If a company's stock is split, the share price will change as well. Following a break, the stock price will fall because the number of shares has increased Splitting equity in two for a 2 free ratio reduces share price by half. This results in an unchanged market valuation, regardless of how many shares are created and how much they cost.

During a stock split, the firm issues new shares to shareholders, therefore increasing the total number of shares in circulation by the stated ratio. Most investors find the price of a company's stock more manageable when it is divided into smaller shares, which makes it more accessible to a wider spectrum of investors.

Why Do Companies Engage in Stock Splits?

Shares of a firm may be split if the price of the stock has risen to a point where confident investors are concerned or when the cost of the stock has risen above that of similar companies in the same industry. Even though the company's worth hasn't changed, a stock split can make its shares appear more reasonable. The stock's liquidity may be improved as a result.

A stock split can result in a rise in share price, even if the stock price drops immediately following the break. As a result, small investors may see the stock as more reasonable and decide to purchase it. Stock prices rise as a result of increased demand. Another explanation is that a stock split signals to the market that the value of the company's stock has been rising leading investors to believe that this upward trend will continue. Demand and prices rise as a result of this.

A seven-for-one stock split by Apple Inc. in June 2014 aimed to make the company's shares more widely available to a broader range of investors. Before the division, the opening price of each share was about $649.88. At the opening of the market, the price per share was $92.70 (648.90 / 7), following the split.

Shareholders who held shares previous to the stock split received a bonus of six additional shares. Because of the stock split, an owner with one thousand AAPL shares has doubled their holdings to seven thousand. The total number of Apple shares in circulation has risen from 861 million to 6 billion since the beginning of the year. However, the company's market value remained stable at $556 billion. The following day, the stock price rose to a high of $95.05 due to the reduced stock price's increased demand.

Reverse Stock Split: What Is It?

A reverse split is another type of stock split. Firms with small market capitalization frequently utilize this method to raise pricing. If a firm is concerned that its shares will be delisted or wants to improve its standing in the marketplace, it may take this step. Many stock exchanges will delist stocks if the price per share falls below a specific threshold.

Shareholders would now own 2 million shares at $2.50 per share if a company reversed a one-for-five split, with 10 million outstanding shares at 0.50 cents each. It's worth $5 million in both scenarios.

Speculators were discouraged from trading Citigroup stock in May 2011 when the company reversed split its shares one-for-10. After the reverse split, the stock's price rose from $4.52 to $45.12 per share. An investor's holdings of 10 shares were diluted to only one claim. Even though the company's share count decreased from 29 billion to 2.9 billion, its market value (about $131 billion) remained the same.

Even if the arithmetic doesn't work out perfectly, you might get fractional shares (7.5 in this case) or cash as a rounding mistake if there is a reverse split (for example, you have five claims, and there is a two-for-three reverse split). CASH IN PLACE OF CREDIT (CIL). CIL is considered a sale of stock for tax reasons.

The Bottom Line

When a company's stock price rises significantly, it is common to use a stock split. The market capitalization (as well as the company's value) remains constant even when the number of outstanding shares rises, and the price per share falls. Because stock splits make shares more accessible to investors of all sizes, they also increase the marketability of the company's stock.

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