When we come to answer this question two stocks come to mind first. Apple Inc, Tesla, Microsoft, and Amazon. With the latest stock splits in Apple and Tesla. Starting with Tesla, which had a stock split as recent as in August 2020 of 5-for-1. The stock split was a decision to eliminate the trading price and make it more comfortable for other investors to join. Apple has already had five stock splits with the latest one being also in August 2020 on a 4-for-1 stock split basis. However, the stock that split the most in the past is Microsoft. Its last stock split happened in 2003 on a 2-for-1 basis and it was the ninth stock split to happen.
That’s impressive! On the other hand, Amazon has never had a stock split before, and its stock is now trading over $3000 per share. This is an example of a company that wants to show more prestige. Amazon is considered to be a valuable company without the need to open the gates for new investors. However, a stock split would bring new investors in since there are many questions around when Amazon is doing a stock split.
A stock split is happening when a company decides to divide its current shares into more shares. For example, Apple Inc has had five stock splits from the time, they went public in the market. Their last stock split took place in August 2020 on a 4-for-1 basis meaning that for every 1 stock you own that will be multiplied by 4. Therefore you would end up having 4 shares instead of 1.
When such stock splits happen it is usually because the company wants to raise its stock’s liquidity. Although the number of shares multiplies, the value of the money remains the same as before the stock split because it does not add any real value.
This is a corporate action in which a company divides its existing outstanding shares into multiple shares. Companies that choose to split their stocks aim to lower the trading price of their stock to a price range that is acceptable or comfortable for investors to continue trade on. This can also bring new investors in since the price of the stock is now considered to be “comfortable”.
For example, it is more comfortable and preferable to investors to purchase 100 shares at $10 per share, instead of 10 shares at $100 per share. This is why companies that reach high stock prices decide on stock splits and make the price lower.
When a stock split is arranged to happen on a specific date and time, the market automatically adjusts these changes. The decision on the rate of stock split whether this will be 2-for-2, 3-for-1, or 5-for-1, etc., is taken by the board of directors of the company. Moreover, except for the monetary value, the market capitalization is also remaining unchanged.
Market capitalization refers to the total value of a company’s shares of stock. It is important because it allows investors to understand the relative size of a company compared to another. Market capitalization is measuring the worth of a company on the open market as well as its future perception. The reason behind that is clearly because it represents the investors’ willingness to buy the stock at any cost.
It is calculated by multiplying the stock price by its total number of outstanding shares. For instance, a company with 100 million shares selling at $10 per share would have a market cap of 1 billion.
Stock splits are the traditional kind of stock splits and are also known as forward stock splits. However, there is an opposite side to everything, in this case, it’s called reverse stock split. A company that decides on a reverse stock split chooses to decrease the number of its outstanding shares and increase the value of the share price. Like we explained above, the market value does not change in this case either. Companies that decide on a reverse stock split do that due to the share price decreasing to a level low enough to cause a delisting from the exchange. It is very common for companies to be delisted from the market if they do not reach the minimum price required to be listed.
There are many different perspectives on whether a stock split helps or hurts investors. On the one hand, a stock split is a good buy indicator for new investors or even existing ones. This is because it can mean that the company is doing well, and the stock price keeps increasing. Some short-term investors will also join the rally after a stock split since it will bring more volatility in the stock and it can push the stock up very fast. This does not mean that the stock will not face a correction after some time.
A stock split should not be the primary reason investors base their opinion to buy stocks. As mentioned above, it does not cause the business fundamentals to change, and remember the split has no effect on the company’s worth.