Stock market investors are familiar with stock splitting, which attracts new investors. The action aims at splitting one share into multiple shares in some pre-decided ratio but without affecting the total value of all the shares, termed market capitalization. But what happens when a stock splits and whether it is good or bad for investors would require a proper understanding of the event. In plain speak splitting a stock is the company’s prerogative that such action would benefit both investors and the company. So, what happens when a company splits the stock?
An Insight into What Happens When a Stock Splits
Splitting stocks does not change anything except that each share’s price decreases, attracting more investors. As the market capitalization remains unchanged, the stake of each investor remains unaffected when any company splits the shares. It’s a win-win situation for both the company and investors, both existing and prospective.
So, when does a company decide to split stock? The answer is that when the company’s share price increases so much, it becomes difficult for investors to buy new company shares. For example, Amazon’s recent stock split news highlighted the company’s intention of splitting shares in the ratio of 20:1. It meant that one share is now equivalent to 20 shares, but the share value remains unchanged. However, the price of each share is now divided into 20 parts, meaning that Amazon’s share price reached $2,440 at one point, coming down to $125 due to the split.
No Impact on the Ownership Pattern
Share splitting is an exercise that companies undertake as part of some measures to make the shares more attractive to investors. When share prices are too pricey, it slows down investments as the shares become unaffordable for most investors. Therefore, companies might decide to split shares to widen the investor base by attracting new investors, as illustrated in Amazon’s example. After splitting the shares, investors can own more company shares, which can pay back well in the long run. However, it does not change the ownership pattern for investors.
Effects of Stock Split
Shares become more attractive to investors because of considerable price reduction. When does a stock split occur? The action results from the management’s decision to send out a positive signal to investors by reducing the share price to make it more affordable. It’s a sign of a thriving company that invites investors to buy more shares of the company, which are cheap.
The increased stock liquidity makes the shares more accessible to investors who are keen to hold the shares for a considerable long time to reap rich rewards.
Not all companies would like to split stocks, as evident by Tesla, which does not mind the share prices moving upward. The company feels that the high share price helps to increase the company’s attraction to investors.
Except for knowing what happens when a stock splits, investors have nothing to worry about because only does the number of shares increase, but the value remains unchanged.
