What is a Stock Split? – Everything You Need to Know
Stock split in the trading sector is a common thing. What positive changes can this move bring if you have heard about it? How profitable is it to the company? Splitting shares – what do you need to know about it? Let’s dive.
A stock split occurs when a company increases the number of shares to increase stock liquidity. While the number of active shares is rising, the total dollar value of all existing shares remains the same. The split does not fundamentally change the value of the company. The most common split coefficients are 2-1 or 3-1. This means that the shareholder will have two or three shares. To be more precise, a share split is a corporate action in which a company issues additional shares to shareholders. This, in turn, increases their total number based on the indicated odds based on the stocks they previously held. Companies often choose to split their shares. This is an excellent way to lower the trading price in a more comfortable range for most investors and increase the liquidity of trading their stocks.
Most investors are more comfortable buying, for example, $100 shares than $1,000 stakes. So when prices rise significantly, many public companies split shares. Although the number of stakes increases when the stakes are broken, the total dollar value of the shares remains the same compared to the previous split. It is worth noting that the division does not make the company more valuable.
Reasons for Stock Splitting
When a share split is announced, companies often describe it as a one-time special dividend on stakes. This is not a quarterly cash dividend. It simply means that the company will split the shares by issuing additional shares. The company’s board of directors can split the shares in any ratio. For example, a stock split can be for 2-1, 3-1, 5-1, 10-1, 100-1, and so on. On the other hand, the price will reduce by dividing the old stock price by three after dividing the old stock by 3-1. This is because the division of shares does not change the company’s value according to market capitalization.
Why do companies go through the difficulties and costs of stockpiling? For several reasons. First, the company often ceases to split when the shares price is relatively high. Second, a more significant number of shares may lead to greater liquidity. It even encourages trade. Increasing stock liquidity makes it easier for buyers and sellers to trade stocks. Liquidity allows traders and investors to buy and sell company shares without influencing the stock price. This can help companies buy their shares at a lower cost; Because their orders will not increase the stock price of more liquid stocks. For some companies, this can mean significant savings.
While the split should not affect the stock price, it often leads to a renewed interest from investors; this can positively affect stock prices. Although this effect may diminish over time; The distribution of shares by blue-chip companies is a growth signal for investors.
An Example of a Stock Split
Many top companies regularly see their stock prices return to the levels they previously held stocks; This leads to another division of shares. Walmart, for example, split its stake 11 times on a 2-1 basis between its stock market debut between 1970 and 1999. An investor who bought 100 shares in Walmart’s initial public offering would see the shares rise to 204,800 over the next 30 years; Without additional purchases.
In 2020, Apple divided its shares into 4, 1.3. Before the split, each share was selling for about $540. After the break, the stock price on the open market was $135. An investor who owned 1,000 shares after pre-splitting would own 4,000 shares. Apple shares rose from $3.4 billion to about $13.6 billion, and market capitalization was $2 trillion.
