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What Is a Stock Split?
A (forward) stock split happens when a company increases the number of its shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of all shares outstanding remains the same because a split does not fundamentally change the company’s value.
An original article by Lorimer Wilson, Managing Editor of munKNEE.com
Why Does A Company Do A Stock Split?
- A lower stock price: Most investors are more comfortable purchasing, say, 100 shares of a $10 stock as opposed to 1 share of a $1,000 stock so, when the share price has risen substantially, many public companies end up declaring a stock split to intentionally lower the price of a single share, making the company’s stock more affordable. Although the number of shares outstanding increases in a stock split, the total dollar value of the shares remains the same compared with pre-split amounts, because the split does not make the company more valuable. A 10-for-1 stock split, for example, means that for every one share held by an investor, there will now be ten or, in other words, the number of outstanding shares in the market will increase 10-fold. On the other hand, the price per share after the 10-for-1 stock split will be reduced by dividing the old share price by 10.
- Greater stock liquidity: Increasing stock liquidity makes trading the stock easier for both buyers and sellers by narrowing the bid-ask spread and this can also help companies repurchase their shares at a lower cost since this their orders will have less impact on a more liquid security.
Does A Stock Split Affect the Stock Price?
A split should have no effect on a stock’s price but it often results in renewed investor interest, which can have a positive effect on the stock price over time. A stock split usually is a bullish signal for investors as it indicates that company management has considerable confidence in the prospects of a company and wants to establish a bigger runway for growth.
What Are the Disadvantages of a Stock Split?
Intentionally reducing a company’s share price with a stock split runs the risk of an underperforming stock’s share price dropping below $1 and being delisted by exchanges such as the Nasdaq if it should remain so for more than 180 days.
What is A Reverse Stock Split?
A company carrying out a reverse stock split decreases the number of its outstanding shares and increases the share price proportionately. As with a forward stock split, the market value of the company after a reverse stock split remains the same.
Why Would A Company Do A Reverse Stock Split?
- The company runs the risk of being delisted from an exchange for not meeting the minimum price required for a listing.
- Certain mutual funds may not invest in stocks priced below a preset minimum per share.
- A company might also want to make its stock more appealing to investors who may perceive higher-priced shares as more valuable. This tactic is often utilized by smaller entities that trade in over-the-counter markets rather than on the major U.S. stock exchanges.
What Is An Example of a Recent Reverse Stock Split?
Aurora Cannabis (ACB) underwent a 1-for-10 reverse stock split on February 20, 2024, with every common share being converted into 0.1 new ACB shares.