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Stock Splits are Meaningless – or Are They? Is A Stock Split Good Or Bad For Investors?

Stock-split

If you invest or are thinking of investing, you may have heard about stock splits and may be wondering what they actually mean. In this article, we’ll discuss all you need to know about splits. We’ll cover what they involve and how they affect the price of shares, to how they could impact investors.

And importantly – What effect (if any) do they have on the underlying value of the company?
By the time you finish reading, you will have a better idea of whether stock splits are good or bad.

Investing in the market can seem intimidating for the average person, especially if you don’t understand the terminology or the importance of the number of shares in a company. But don’t let the complexity of the market scare you away from potentially making smart investments — with the right guidance, anyone can learn the basics of investing and begin to make smart decisions in the market.

What Is a Stock Split?

A stock split is a corporate action that divides a company’s existing shares into multiple new shares. It is a way of raising the trading volume of a stock by lowering its share price, while the total market capitalization (the number of shares multiplied by the share price) remains the same. For example, a company with 10,000 shares of stock trading at $100 each can do a 2-for-1 split and end up with 20,000 shares trading at $50 each.

The number of shares of a company increases, while the value of each share decreases. The split itself does not have any effect on the value of the company or the underlying assets; it simply results in a change in the number of shares outstanding.

Stock splits do, however, have an effect on both the price and the liquidity of the stock. Lower share prices can make the stock more accessible to individual investors, and the increased number of shares generally increases the liquidity of the stock.

Since splits don’t actually increase the value of a stock, it is not necessarily a good or bad thing for investors. It is mostly a psychological move that can affect investor sentiment. On the one hand, some investors may be attracted by the lower share price, while others may be turned off by the perception that the company is trying to “game” the stock market. Ultimately, whether a stock split is deemed good or bad will depend on the individual investor’s view on the company in question.

The key is that a stock split increases the number of shares available and as we will see, this affects a number of financial calculations that affect valuation.

How Does a Stock Split Affect Share Price?

This question can be a significant one for investors. Let’s examine the effects the share price first.

The impact that a stock split has on share price depends upon the resulting decrease in the price per share of the stock. Investors may be more likely to purchase shares if the cost is lower, and this increases the overall demand for the stock. As demand for stocks rises, the share price typically increases.

However, a split does not necessarily guarantee an increase in share price. This is because there are many other underlying factors that can influence the market price of a stock. For instance, the company’s performance, industry trends, and overall economic conditions all have a major role in the success of the stock. It is important to consider all of these factors before investing in a stock, regardless of any split.

Before the Stock Split

When a company’s board of directors decide to divide the company’s existing shares into multiple shares, they announce a “split”. For example, a 2-for-1 stock split would mean that each existing shareholder would get two shares for every one share that they held before the split. Splits are usually executed in order to make the stock appear more affordable to the public, thus increasing its marketability.

Often times, the company’s share price is usually quite high before a split. This can be off-putting for many small-time investors, who may not have the capital to purchase a large number of shares. This is where stock splits come into play. By splitting their equity, companies can make it more accessible to the average investor and attract more buyers.

After the Stock Split

When determining whether this is good or bad for investors, it is important to consider what happens to the investment next. After the stock split, the number of shares outstanding increases, but the market capitalization (price per share multiplied by the total number of shares) stays the same.

For instance, if a company splits its shares 2-for-1, the number of shares outstanding doubles and the price per share is cut in half. This means that investors can buy twice as many shares at half the price as they could before the split. The market capitalization of the company stays the same, even though the stock price changes.

It is important to note that stock splits are not always beneficial.

Theoretically, the stock split does not affect the value of the company. However, splits actually dilute some factors of financial performance, as we will cover in the next section.

Stock splits are usually viewed as a non-event by the market because they do not change the intrinsic value of the company. There is some evidence that stock splits can benefit investors by making the stock more attractive to new investors and more liquid. However, it is important to consider the company’s underlying fundamentals before making a decision about whether or not to invest in a company that has split its shares.

The Impact of a Stock Split on Investors

When it comes to deciding whether or not to invest in a certain stock, one important factor to consider is whether or not the company has recently performed a stock split. Stock splits are highly publicized events and are typically considered to be a good sign for investors, but is this really the case? What are the actual implications for investors when a company performs a stock split?

As we’ve covered, stock splits do not have any real effect on a company’s market value and are primarily used to encourage trading and creating liquidity in the market. While the price of a company’s stock is lower after a split, the company is not actually any more or less valuable than it was before the split.

Despite the fact that splits do not affect a company’s market value, there are still some implications for investors. For example, a 2-1 split will cut the earning per share (EPS) value in half. This doesn’t mean the company earned less money, only that each share entitles its owner to half of the earnings that it did before the split.

If you were already an owner, you haven’t lost any of your share of the earnings, because you now own twice as much even though each is worth less.

Sometimes a company can use a split to make their financial metrics appear better than they were before the split. An example of this is the debt per share. The debt stays the same, but it’s now divided across more shares, so the debt per share values goes down. As with EPS, it’s important that investors be aware of splits and adjust any “per share” calculation accordingly.

Overall, stock splits are generally advertised as a good sign for investors and can lead to increased demand for the stock. However, it is important to remember that stock splits do not actually affect a company’s market value. Because of this, any impact of stock splits on the stock price is only in the short-term and it is still important to consider the fundamentals of a company and do your own research before investing.

Conclusion

In conclusion, stock splits are not necessarily always a good or a bad thing for investors. Depending on the situation, it can be beneficial or detrimental to investors. Stock splits can add liquidity and make shares more attractive to small investors, but can also result in higher fees and dilution for larger investors. Stock splits can also be used to manipulate prices and create short-term gains for investors.

It should also be noted that stock splits can drive the psychology of investors and can be used strategically to boost investor confidence and attract more investors.

Ultimately, it is important for investors to consider the overall economic situation, market fundamentals, and the company’s financial and business performance before making a decision as to whether or not a stock split is a good or bad move.

Frequently Asked Questions About Stock Splits

When it comes to investing, stock splits have been a source of debate and confusion. Many investors are unsure of the implications of a stock split and whether it is a good or bad thing for their investments. The truth is, stock splits can be beneficial in some cases, but they can also have negative outcomes. To help investors better understand what a stock split is, and if it is the right decision for them, we have gathered the answers to some of the most frequently asked questions about stock splits.

What is a stock split?

A stock split is a corporate action in which a company increases the number of its shares that are outstanding by dividing each existing share into multiple shares. This has the effect of lowering the price of each share; for example, if a company conducts a 2-for-1 stock split, each share will be worth half of its previous value.

Is a stock split good or bad for investors?

Stock splits are not inherently good or bad for investors. Generally, stock splits are positive for investors, as they can make shares more accessible to retail investors and increase trading liquidity. Also, a lower share price often leads to higher stock prices, as investors are more likely to invest in a cheaper stock price. However, there are some drawbacks: some investors believe that stock splits are a sign that a company’s stock is overvalued, and it can affect the voting power of shareholders if the number of shares outstanding is significantly increased.

What are the advantages of a stock split?

The primary advantage of a stock split is that it makes shares more accessible for investors with limited capital. When the price of a stock is high, it can be difficult for investors to buy a large enough number of shares to generate meaningful profits. With a stock split, investors can purchase a larger number of shares at a lower price. Additionally, stock splits can lead to increased trading volume and liquidity, as more investors are likely to invest in a cheaper stock price. This can lead to higher stock prices due to increased demand.

What are the disadvantages of a stock split?

The primary disadvantage of a stock split is that it can reduce the voting power of shareholders if the number of outstanding shares is significantly increased. Additionally, some investors believe that a stock split is a sign that a company’s stock is overvalued and could be a sign of trouble for the company. Finally, stock splits can lead to higher transaction costs due to the increased number of trades.

My name is Michael. My background is in technology, not finance.

What this means is that my head isn’t filled with high-flying, new-economy financial theory nonsense that universities pump out these days to justify the absurdity of wall street.


What I lack in letters following my name I make up for in experience. 20 years of active investing experience – counting 3 (as of March, 2020) bubbles and subsequent busts, to be exact.


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