What is a Stock Split?
A stock split is a corporate action in which a company divides its existing shares into multiple new shares. This increases the total number of shares outstanding while the overall market capitalization remains unchanged. Companies usually perform stock splits to boost the liquidity of their shares and make them more affordable for investors.
Types of Stock Splits
- Forward Split: In a forward split, shareholders receive additional shares for each share they own. For example, in a 2-for-1 split, an investor with 100 shares will end up with 200 shares.
- Reverse Split: This involves consolidating multiple shares into fewer ones, often used by companies looking to increase their share price. For instance, in a 1-for-10 reverse split, an investor with 100 shares would have 10 post-split shares.
Reasons for a Stock Split
Companies might consider a stock split for several reasons, including:
- To make shares more affordable without changing the company's overall value.
- To attract a broader range of investors by decreasing the per-share price.
- To improve trading liquidity by increasing the number of shares available for trading.
Impact on Shareholders
Even though a stock split does not alter a shareholder's total investment value, it can have psychological effects. Investors may perceive a lower price per share as an opportunity, often leading to increased demand that can affect the stock price positively post-split.