Why a Stock Split May Not Be of Great Value to Existing Shareholders

A company's board of directors decides if a stock will split to increase the number of shares outstanding. A stock split will also affect the stock's price. A stock split is most common when a stock has risen in price.

Significance

If a stock splits two for one, the price of the stock is halved. The company's market capitalizations remains the same and the number of outstanding shares increases.

Value

While a stock split increases the number of shares for a stock holder, it does not increase their investment value. Some stock splits can be very dilutive to a company thus decreasing its value.

Increases Activity

A stock split may increase a stock's trading activity both before and after the split. The stock may become more active and volitable and subject to price swings both up and down.

Profit Taking

An announcement of a stock split may cause the stock price to increase before the split. Many may sell on the news and take profits from the rising price.

No Impact

Sometimes, a stock split will have no immediate impact on a shareholder's position other than to change the number of shares owned. At times, no money will be made or lost.

Reverse Split

A reverse stock split decreases the number of shares outstanding. It often reduces a stock's liquidity and trading volume and often signals a cry of help from the company.

References

• Investopedia.com -- Significance of stock splits
• Stock split -- good or bad?
• Activity; No Impact; Reverse Split