How a Stock Split Affects a Shareholder's Equity

by Cynthia Hartman

Stock splits happen fairly often among publicly held corporations. Investing sites such as Yahoo! Finance maintain a splits calendar that lists the companies and split ratios by announcement date. Stock splits may have beneficial effects for companies. According to a study of the Thai stock market in 2008, strategically planned stock splits tend to raise stock prices. Companies can split their stock more than once. Apple Inc.'s, for example has had three two-for-one stock splits since 1987.

Stock Splits

Publicly held companies use stock splits as a tool to manage their stock price and keep it affordable for the largest group of investors. When a public company's share price grows too high relative to its peer companies, or if the company thinks is too expensive for investors, the firm can split the shares of stock to reduce the price.

Shareholders' Equity

A shareholder's equity is the amount of money invested in a company's stock. On any given day, this value is the total number of shares owned multiplied by the stock's current share price. Shareholders' equity is also stated on a company's balance sheet. It shows the total equity investments, or total number of stock shares, held by all shareholders in the company.

Effects

Stock splits reduce the price of the stock, but not the value of the company. Investors who own shares in a company that splits its stock will see their number of shares grow, while the price of each share is reduced accordingly, depending on the split ratio. The investor's number of shares owned, multiplied by the current share price, results in the same value after the stock split as it was before the split took place. A stock split does not result in any stockholder equity change for the individual investor or the company.

Considerations

Companies can choose different variations of stock splits. For example, a two-for-one split gives each investor two shares of stock for each share owned. Correspondingly, each share price will be cut in half. Some firms increase the split to a three-for-one or four-for-one ratio, with each share price reduced in the appropriate ratio to preserve the exact value of the shareholder's investment. Companies wishing to increase their stock price can perform a reverse stock split, which consolidates the same value into fewer shares. In this case, an investor owning 10 shares worth $5s each would, in a reverse five-for-one stock split, end up owning two shares worth $25 each. In both cases, the shareholder's equity investment does not change.

About the Author

Cynthia Hartman started writing in 2007 and has written for several different websites. She brings more than 20 years of experience in finance and business ownership. Hartman holds a Bachelor of Science in finance and business economics from the University of Southern California.

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