Key Takeways
Stock split means that a listed company divides a share into several shares.
A stock split usually occurs when the stock price is too high, and a reverse stock split may be performed when the stock price is too low.
The stock split will not change the total value and proportion of shares held by shareholders, and the market capitalization of the company will remain unchanged. But this will lower the stock price, make the stock more affordable and improve the liquidity of the stock.
A split may lead to a rise in the share price, but there is no guarantee. The stock price performance of different companies may be different.
Understand stock split
Relationships can be split, and stocks can be split. Stock split means that a listed company divides a share into several shares.
Why would this company do that? This often happens when share prices are too high and may affect the desire of many investors to buy shares.
The split ratio can be any value, such as 1: 2, 1: 3, and 4: 3. When the split ratio is 1: 2, one share is divided into two shares, and the share price will be halved at the same time.
If you hold 100 shares at a price of $20 per share, after the split, you will own a total of 200 shares at a price of $10 per share. Obviously, the total value you have has not changed.
Although the number of tradable shares has increased, the proportion of shares held by shareholders and the market capitalization of the company remain unchanged.
In addition, many price charts are usually adjusted after the split to reflect price movements more clearly. As a result, we usually do not see the price collapse caused by the split.
In addition, when the share price is too low, some listed companies may perform a reverse stock split. They merge several shares into one, and the share price will be adjusted accordingly.
Effect
What is the impact of a stock split?
It will lower the stock price, which may make the stock more affordable and may increase the liquidity of the stock. The split will not lead to a direct rise in the share price, but it may reflect the company's confidence in the future.
For these factors, share prices are likely to rise. But there's no guarantee. Even if the price goes up, maybe the price will come down soon. So we should treat it rationally.
Example
August 2020 Apple 1: 4 split was announced after the release of the third-quarter financial statements. The share price rose 6% after the news, and continued to climb 37% in the following month until the split took place. After the split, prices fell by 25% over the next half month.
In 2020 CSX Corp performed a stock split. But its share price shows a different pattern. From the day of the announcement to the day of the split, the share price fell slightly. But after the split, it rebounded slightly.
Another example is Berkshire Hathaway, It never performs stock splits. According to Warren Buffett's essay, Berkshire wants to attract investors who want to work with the company for a long time, rather than focusing too much on the stock price.
The information contained here is for educational purposes only. No discussion should be seen as investment advice.
