Stocks Split: A Quick Guide to what it is
Stocks split is not uncommon in the market. You’ve probably heard many things about HQBroker Reviews it before, but you maybe don’t know much about it.
For starters, a stock split is like someone giving you two $50 bills in exchange for your $100 bill. Let’s articulate this matter further.
What’s a Stock Split?
A stock split is a corporate actions, meaning it is a decision made by the board of the company. This action increases the number of a corporation’s outstanding shares. They do that by dividing each share. As a result, each resulting share’s price becomes lower. Meanwhile, the company’s capitalization won’t be affected. It will remain the same. This is because the splitting of stocks doesn’t add any real value to each of them.
When stocks split, the number of outstanding shares increases by a specific value. For example, let’s consider a 2-1 stock split. In this kind of stock split, each shareholder gets an additional share for every share he already possesses. However, the value of each share decreases by half. Two shares now have the equal value of one share prior to the split.
Why do companies do stock split?
There are actually many reasons why corporations decide to split stocks.
For one, some Forex Broker Review investors feel that a company’s stock will be too high for them to buy as each share’s value rises. Smaller investors may think that the stock is too unaffordable. Whenever companies split stocks, they lower the stock’s value to a level attractive to investors.
Therefore, a stock split can let the company get new investors. More on psychology, older investors may feel they’re holding more stocks than before. This can be really good for them when the prices go up. In that case, they would have more stock to trade.
On the flip side, stock split are considered irrelevant by many proponents of the financial theory. Nevertheless, stock splits are still done by many companies. These stock splits show that the behaviour of the investors and the actions and decisions of the company do not always follow the financial theory. Due to this fact, a new area of financial theory has been born, called behavioural finance.
What are Reverse Stock Splits?
A reverse stock split is another form of stock split. As the name suggests, it follows the reverse procedure of a stock split.
In effect, the shares that an investor holds will be combined at a specific ratio. Then, the share price will increase as the number of total shares that an investor holds decrease. It doesn’t also change the total value of the company.
Corporations increase the value of their shares in order to either gain more respectability in the market or avoid being delisted from a stock exchange. For the latter one, many stock exchanges delist a company if the stock falls below a certain price level.
Companies have different reasons for having their stocks split. You can always take advantage of this, but you should also know that there are still some risks associated with every stock split.