A stock split or stock divide increases the number of
shares
In financial markets, a share is a unit of equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers to all of the shares of an ...
in a
company
A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members share a common p ...
. For example, after a 2-for-1 split, each investor will own double the number of shares, and each share will be worth half as much.
A stock split causes a decrease of market price of individual shares, but does not change the total
market capitalization
Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders.
Market capitalization is equal to the market price per common share multiplied by t ...
of the company:
stock dilution
Stock dilution, also known as equity dilution, is the decrease in existing shareholders' ownership percentage of a company as a result of the company issuing new equity. New equity increases the total shares outstanding which has a dilutive effec ...
does not occur.
A company may split its stock when the market price per share is so high that it becomes unwieldy when traded. One of the reasons is that a very high share price may deter small investors from buying the shares. Stock splits are usually initiated after a large run up in share price.
Effects
The main effect of stock splits is an increase in the
liquidity
Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include:
* Market liquidity, the ease with which an asset can be sold
* Accounting liquidity, the ability to meet cash obligations when due
* Liqui ...
of a stock: there are more buyers and sellers for 10 shares at $10 than 1 share at $100.
Some companies avoid a stock split to obtain the opposite strategy: by refusing to split the stock and keeping the price high, they reduce trading volume.
Berkshire Hathaway
Berkshire Hathaway Inc. () is an American Multinational corporation, multinational conglomerate (company), conglomerate holding company headquartered in Omaha, Nebraska, United States. Its main business and source of capital is insurance, from ...
is a notable example of this. The company has never had a stock split and each share trades at over US$400,000.
Other effects could be psychological. If many investors believe that a stock split will result in an increased share price and purchase the stock the share price will tend to increase. Others contend that the management of a company, by initiating a stock split, is implicitly
signaling
In signal processing, a signal is a function that conveys information about a phenomenon. Any quantity that can vary over space or time can be used as a signal to share messages between observers. The ''IEEE Transactions on Signal Processing'' ...
its confidence in the future prospects of the company.
In a market where there is a high minimum number of shares, or a penalty for trading in so-called
odd lot
An odd lotter is an investor who purchases shares or other securities in small or unusual quantities. Stocks are typically traded in increments of 100 shares, a quantity known as a ''round lot'' or ''board lot''. The cost of 100 shares of a secur ...
s (a non multiple of some arbitrary number of shares), a reduced share price may attract more attention from small investors. Small investors such as these, however, will have negligible impact on the overall price.
Split ratios
Ratios of ''2-for-1'', ''3-for-1'', and ''3-for-2'' splits are the most common, but any ratio is possible. Splits of 4-for-3, 5-for-2, and 5-for-4 are used, though less frequently. Investors will sometimes receive cash payments in lieu of fractional shares.
In the above examples ‘y-for-x’ Shows the number of shares before (x) and after (y). Other common reporting nomenclatures are ‘x-y’ and ‘stock dividend’ of
-x. In the above ‘3-for-1’ example (or 1-3 and 2 share stock dividend) would mean a stockholder holding 100 shares (on record date) will receive 200 new shares after the split for those 100 shares.
Example
A company which has 100 issued shares priced at $50 per share, has a market capitalization of $5000 = 100 × $50. If the company splits its stock 2-for-1, there are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25 = $5000 / 200. The market capitalization is 200 × $25 = $5000, the same as before the split.
Currency
The analog in
currency
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general def ...
would be
redenomination
In monetary economics, redenomination is the process of changing the face value of banknotes and coins in circulation. It may be done because inflation has made the currency unit so small that only large denominations of the currency are in cir ...
. This would be where a currency increases in value so that people have to use small fractions. Then a new unit (such as dollar) can be introduced, such that an old unit is equal to 10 (or some number) new units.
An example is with the Australian currency. In 1966 the Australian pound was split into two
Australian dollar
The Australian dollar (sign: $; code: AUD) is the currency of Australia, including its external territories: Christmas Island, Cocos (Keeling) Islands, and Norfolk Island. It is officially used as currency by three independent Pacific Island s ...
s.
Effect on historical charts
When a stock splits, many charts show it similarly to a
dividend
A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-in ...
payout and therefore do not show a dramatic dip in price. Taking the same example as above, a company with 100 shares of stock priced at $50 per share. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares.
The price of each share is adjusted to $25. As a result, when looking at a historical chart, one might expect to see the stock dropping from $50 to $25. To avoid these discontinuities, many charts use what is known as an adjusted share price; that is, they divide all closing prices before the split by the split ratio. Thus, when looking at the charts it will seem as if the price was always $25. Both the Yahoo! historical price charts and the Google historical price charts
Google Finance Historical Charts
/ref> show the adjusted close prices.
See also
* Reverse stock split
* Share repurchase also known as stock buyback
*Market depth
In finance, market depth is a real-time list displaying the quantity to be sold versus unit price. The list is organized by price level and is reflective of real-time market activity. Mathematically, it is the size of an order needed to move th ...
References
External links
Profiting From Special Situations Like Stock Splits
Swiss stock split calendar for European companies and worldwide companies incl. U.S. companies (in German)
Useful resource for historical split dates and prices of all stocks
{{Stock market
Stock market
Corporate finance
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