What is stock split ?

STOCK SPLITS AND THEIR BENEFITS

Most companies have shares in the market which are outstanding. A stock split basically is a ruling made by the board of directors of a company. It is done with an aim to increase the outstanding shares through the process of issuing extra shares to the present shareholders. It is not certain if a stock split do actually benefit the shareholders. Rather it is estimated that stock splits affect the price of shares in the market.


Working out the stock split

A stock split will be calculated in the following way in a nutshell, if a common stock split of 2 to 1 is done, all shareholders having one stock are meant to be given one additional share such that, for a company which had twenty million shares as outstanding stock before the split was made, will be deemed forty million shares as outstanding shares after a two for one split. Stock prices are affected by stock splits, in effect the split ends up reducing the stock price as the amount of shares outstanding become increased. The split demonstrated above shows that the split shares are halved. Market capitalization will always remain constant as the price of stocks change and outstanding shares also change.

Stock split analysis

Most companies that are noticing that the price of their shares is increasing to a margin that is either higher or lower than the level of prices for similar companies in similar sector will generally move to make a stock split. The main aim is to ensure the shares will become affordable to the small scale investors although all this transaction will happen and not change the original value of the company’s stock. Stock splits end up in increase of stock prices as soon as a decrease is experienced after a split. Many investors will begin to show attraction to the reduced price and start buying. This will in turn boost demand and drive the price up.

Investors benefits

When a price increases a stock split serves to create a signal that is sent to the market alerting investors that the share price of the company is increasing so that most investors will take up the cue that the prices of the shares is going up, which will in turn increase demand plus the price. A reverse split is a different versions of stocks split whereby companies which have share prices which are very low, desire on increasing these prices to enable or boost the rankings of the company or prevent companies from future delisting.

Conclusion

Before deciding on an investment decision, it is always prudent to make a realistic evaluation of stocks and the market at large. If you intend on using stock split to be your marker, you need to realize that you should consider all other factors. Stock splits are used by a company for the sole purpose of making their prices to increase. And as a result they end up making shares much more affordable.