Stock split


Stock split

A stock split or stock divide increases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included.

Take, for example, a company with 100 shares of stock priced at $50 per share. The market capitalization is 100 × $50, or $5000. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25. The market capitalization is 200 × $25 = $5000, the same as before the split.

Ratios of 2-for-1, 3-for-1, and 3-for-2 splits are the most common, but any ratio is possible. Splits of 4-for-3, 5-for-2, and 5-for-4 are used, though less frequently. Investors will sometimes receive cash payments in lieu of fractional shares.

It is often claimed that stock splits, in and of themselves, lead to higher stock prices; research, however, does not bear this out. What is true is that stock splits are usually initiated after a large run up in share price. Momentum investing would suggest that such a trend would continue regardless of the stock split. In any case, stock splits do increase the liquidity of a stock; there are more buyers and sellers for 10 shares at $10 than 1 share at $100.

Other effects could be psychological. If many investors believe that a stock split will result in an increased share price and purchase the stock the share price will tend to increase. Others contend that the management of a company, by initiating a stock split, is implicitly signaling its confidence in the future prospects of the company.

In a market where there is a high minimum number of shares, or a penalty for trading in so-called odd lots (a non multiple of some arbitrary number of shares), a reduced share price may attract more attention from small investors. Small investors such as these, however, will have negligible impact on the overall price.

Effect on historical charts

When a stock splits it is shown on many charts similar to a dividend payout, and therefore does not show a dramatic dip in price. Taking the same example as above, a company with 100 shares of stock priced at $50 per share. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25. Based on this example you might expect to see the stock dropping from $50 to $25. This would cause chaos in the market as investors would panic if they did not take time to realize that there was a stock split. So what is done is something called adjusted close price. This adjusted close price will take all the closing prices before the split and divide them by the split ratio. So when you look at the charts it will seem as if the price was always $25. Both the Yahoo! historical price charts [ [http://finance.yahoo.com/q/hp?s=CI&a=05&b=1&c=2007&d=05&e=8&f=2007&g=d Yahoo Finance Historical Charts] ] and the Google historical price charts [ [http://finance.google.com/finance/historical?cid=6276&startdate=Jun++1%2C+2007&enddate=Jun++8%2C+2007 Google Finance Historical Charts] ] show the adjusted close prices.

ee also

*Reverse stock split
*Share dividend
*Share repurchase also known as stock buyback
*Berkshire Hathaway, which has never had a stock split, has at times been valued at over US$140,000 per share.
*Market depth

External links

* [http://www.stocksplits.net/1splits.htm Stock split calendar showing prices pre-split and post-split]
* [http://www.sinletter.com/blogComment.aspx?id=103 Profiting From Special Situations Like Stock Splits]
* [http://biz.yahoo.com/c/s.html Stock split calendar for U.S. companies]
* [http://www.essortment.com/home/financialdefini_seur.htm Stock split and reverse split examples for shareholders]
* [http://www.aktiensplits.ch/?Splitkalender Swiss stock split calendar for European companies and worldwide companies incl. U.S. companies (in German)]


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Look at other dictionaries:

  • stock split — n: the division of the outstanding shares of a corporation into a larger number of shares thereby reducing the value of each share but not the total value of each holding compare reverse stock split ◇ The purpose of a stock split is to make the… …   Law dictionary

  • stock split — n. the act or result of splitting stock: see SPLIT (vt. 7) * * * …   Universalium

  • stock split — n. the act or result of splitting stock: see SPLIT (vt. 7) …   English World dictionary

  • stock split — Occurs when a firm issues new shares of stock and in turn lowers the current market price of its stock to a level that is proportionate to pre split prices. For example, if IBM trades at $100 before a two for one split, after the split it will… …   Financial and business terms

  • Stock split — Occurs when a firm issues new shares of stock but in turn lowers the current market price of its stock to a level that is proportionate to pre split prices. For example, if IBM trades at $100 before a 2 for 1 split, after the split it will trade… …   Financial and business terms

  • stock split — noun an increase in the number of outstanding shares of a corporation without changing the shareholders equity they announced a two for one split of the common stock • Syn: ↑split, ↑split up • Hypernyms: ↑increase, ↑step up * * * stock split …   Useful english dictionary

  • Stock Split — A corporate action in which a company s existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre split… …   Investment dictionary

  • stock split — noun Date: 1950 a division of corporate stock by the issuing to existing shareholders of a specified number of new shares with a corresponding lowering of par value for each outstanding share compare stock dividend …   New Collegiate Dictionary

  • stock split — See subdivision See also change in nominal value Increase in a corporation s number of outstanding equities without any change in the shareholder s equity or the aggregate market value at the time of the split. Equity price and nominal value are… …   Euroclear glossary

  • stock split — /ˈstɒk splɪt/ (say stok split) noun an issue of free ordinary shares in some proportion to existing shares …   Australian English dictionary


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