A stock split is a corporate action taken by a publicly traded company, in which the company increases the number of outstanding shares by issuing more shares to current shareholders. The most common type of stock split is a “reverse stock split”, where the number of shares is reduced, usually by a factor of 2, 3 or more.
For example, if a company conducts a 2-for-1 stock split, an investor who previously held 1 share of the stock will now own 2 shares, while the value of each share will be halved. If a company conducts a 3-for-1 stock split, an investor who previously held 1 share will now own 3 shares, and the value of each share will be reduced to 1/3 of the original value.
Stock splits are usually done to make the stock more accessible and affordable for small investors by reducing the per-share price. Additionally, it’s also believed that a lower stock price can make a stock more attractive to retail investors, and can increase liquidity in the stock.
Stock splits also do not affect the total market capitalisation of a company, and also it does not change the underlying financial performance of the company. It is mainly a cosmetic change to adjust the share price to a certain level, making it more attractive to retail investors.
It’s worth noting that stock splits do not guarantee increased share price or increased trading volume and investors should not base their investment decisions solely on the occurrence of a stock split. In addition, many companies that conduct reverse stock split may not be in good financial position, they may want to maintain or increase their stock price but they are also facing underlying financial problems.
A stock split is a corporate action in which a company increases the number of outstanding shares by issuing more shares to current shareholders. It’s usually done to make the stock more accessible and affordable for small investors by reducing the per-share price and it also believed that a lower stock price can increase liquidity. It’s important to note that a stock split doesn’t affect the total market capitalisation of a company and also doesn’t change the underlying financial performance of the company, it’s mainly a cosmetic change. Investors should not base their investment decisions solely on the occurrence of a stock split and should research the underlying financial performance of the company before making any investment decisions.
« Back to Financial Terms Index