Stock Splits Explained Simply
Stock splits confused some investors.
It's natural to think doubling the shares will double your money, but that's not true.
When a company splits its stock, its market capitalization remains unchanged.
Assume a company has 10 million shares in total trading for $50 each.
Its market capitalization is $500 million (10 million shares X $50 share price).
The company chooses to do a 2-for-1 stock split, which doubles the amount of shares.
That would cause the price of the stock to get cut in half.
After the split, the company has 20 million shares in total trading for $25 each.
Its market capitalization is still $500 million (20 million shares X $25 share price).
The biggest change is that the dollar price of a single share gets cut in half.
Think of it like ordering a pizza and being asked if you want 6 slices or 12.
Cutting the pizza into 12 slices doesn't create more pizza, it creates more slices!
So, if nothing changes, why do companies split their stocks?
There are four primary reasons:
Boosting Liquidity: Historically, it was easier to trade 10 shares at $10 than 1 share at $100. This isn't the case anymore with fractional shares and $0 commissions.
Dow Jones Inclusion: The Dow Jones Industrial Average is a price-weighted index, so the share price matters. Companies with high-priced stocks are excluded. This is why Apple split its stock 7-for-1 in 2014. The move led to its inclusion in the Dow Jones in 2015.
Market Cap: Some investors won't invest in a $100 stock, but they will buy $10 stocks. This is especially true for new investors who don't understand market capitalization. The lower per-share prices can attract more buyers, which can boost the market cap.
A Sign of Confidence: When a company announces a stock split, it's historically been a signal that says, "We believe in our future!"
Remember, stock splits don't change a company's value.
However, there's little downside to doing them. Since there are some upsides, there's no reason for a company NOT to split its stock.
Some memorable stock split event:
1) Tesla did a 3-for-1 stock split on August 17 2022
2) Nvidia did a 4-for-1 stock split on 20th July 2021
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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mr_cashcow : Reverse split
sociable Dingo_8604 mr_cashcow: This RS means reversed of everything above?
mr_cashcow sociable Dingo_8604: Unfortunately yes, in order for the stock price to stay in compliance they do a reverse split
From investopedia: A reverse stock split consolidates the number of existing shares of stock held by shareholders into fewer shares. A reverse stock split does not directly impact a company's value (only its stock price). It can signal a company in distress since it raises the value of otherwise low-priced shares
BrianjhOP sociable Dingo_8604: ya. but you rarely will hear companies do that. only in financial dismay, then the company might resort to that. normally it signals bad signs
mr_cashcow BrianjhOP: Encounter before....don't ask me which stock
BrianjhOP mr_cashcow: AIG?
sociable Dingo_8604 BrianjhOP: Then better to sell away the stocks first before they reverse split
BrianjhOP sociable Dingo_8604: big brain
time
NYCJames : Excuse me, if 10 million shares are 50 US dollars each, shouldn't the total value be 500 million? Why 50 million dollars?
BrianjhOP NYCJames: Yes, 500 million, thank you for correcting me. I changed