When a company enacts a stock split, each share of the company’s stock becomes two separate shares. The total number of stock shares available on the market doubles and the number of shares that each stockholder owns also doubles. The value of the shares, however, split along with the shares, which decreases the value of each share by half.
The logic regarding why a company may choose to split a stock is uncertain, although splits largely serve to keep stocks within a certain trading range or stock price. This trading range may have proven to be optimal for sales of the company’s stock or may simply keep prices low enough that average stock traders can afford to take part in the trading of the stock.
How It Affects Shareholders
The effect a stock split has on shareholders extends only as far as an increase in shares. Because the value of the shares decrease by half as the stock splits, the value that each shareholder has in the company’s stock remains exactly the same. If a shareholder owns 10 shares of a stock at $200 per share, the shareholders ends up with 20 shares at $100 per share in a split, so the stock value is the same.
When Shares Rise
If the company made accurate predictions regarding the optimal trading range for the stock, the split may help the stock gain in value. For example, if a stockholder ends up with 20 shares of in a split and it rises back to a $200 per share price again, the stockholder ends up with double the value that he had prior to the stock split.
Companies control when and if they split their stock shares. Although a stock split doesn’t change the value of the stock on the market, nor indicate any type of financial trouble with the company, it may appear that way to any investor who is unaware of the stock split. When the split occurs, the market value of the stock drops by half, which can make it appear as if the stock is quickly losing value.
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