Stock Split Information

When a company changes all its outstanding shares into a larger number of shares, that's a stock split. Such splits initially have no impact on the value of a stockholder's holdings because after the split, each share is worth proportionally less than before the split. Still, for a successful company in the long run, a stock split can be a technique for increasing shareholder value.

Mechanics of a Stock Split

Stock splits must be approved a company's board of directors and usually voted on by the shareholders. Each shareholder at the time of the split receives a fixed amount of additional shares as a result. For example, a 2-for-1 split, which is fairly common, would result in an owner having 1,000 shares at $25 a share instead of 500 shares at $50 a share.

Why Split

The main reason companies undertake a split is psychological. "The primary motive is to make shares seem more affordable to small investors, even though the underlying value of the company has not changed," says Investopedia (see link in References).

Often Have the Desired Effect

Since it is less daunting to buy a stock at $25 a share than $50--it seems like a bargain--more buyers are often attracted to a stock after a split. "Shortly after a split, the price of the stock may rise, owing to increased demand," according to Dean and Christine Ammer in the "Dictionary of Business and Economics."

Sometimes Splits Don't Change Anything

The positive psychological effect described above won't happen, however, if the company, industry or even the larger economy is in the doldrums. A troubled company can't be helped by such a stratagem, but an otherwise healthy one might be.

Reverse Split

In a reverse split, companies decrease the number of shares outstanding by (for instance) trading 1,000 shares at 50 cents each for 500 shares at $1 each. Companies whose share prices have dropped too low, and which risk de-listing on a stock exchange, sometimes try this tactic.

References

• Stock Split
• Dictionary of Business and Economics; Dean and Christine Ammer; 1984.

Resources

• Stock Split