As a trader, from time-to-time, you may come across a stock split. While a split may not sound like a good thing, it’s not necessarily a bad thing either, especially with stocks. According to Investopedia, stock splits allow companies to increase their shares without inflating the price. Shares are divided to create additional shares. The price of the stock also gets divided, which makes it significantly lower, making it easier for the everyday retail trader to buy stock.
What is a Stock Split?
A stock split occurs when a company decides to divide their shares, and therefore stock price, making shares more liquid, and more affordable. A company normally issues a stock split when their shares are seen as too expensive. Stock splitting makes the shares cheaper, thus making them easier for people to buy and sell. However, stock splits do not cause the stock to increase in value from the split itself.
Essentially, splitting stock is making multiple shares of stock from one main share. For example, if Company X decides to split its stock 3:1, the share would be split by a third (divided by 3) and the current price of the stock would also be split by a third or divided by 3. This doesn’t just apply to people who want to purchase stock, it also affects current shareholders. All of their shares would be tripled in this example. If you held 50 shares of a stock that issues a 3:1 split, you would then own 150 shares.
Stock splits do not give the company more market share or market value. They do, however, increase demand for those stocks because the stocks become more affordable to the average investor, which may cause a slight uptick in the share price. Stock splits are not necessarily good or bad, they are neutral.
Just because a company decides to split its stock, does not mean it’s not as valuable. Although, a company with a higher stock price may be seen as more valuable than companies with lower stock prices in the eyes of the everyday person, though that is not necessarily the reality.
The most common split ratios are:
However, there are many ways for stock to split, such as when Apple issues a 7:1 stock split.
Reverse Stock Split
In addition to normal stock splits, there are also reverse stock splits which decreases shares of stock, resulting in the price of the stock going up. Companies do this to make their stocks worth more while lowering their outstanding shares. Reverse stock splits are similar to regular stock splits in the fact that they use ratios. Normal stock splits add shares and reverse stock splits take away. Reverse stock splits are typically issued when a stock is trading at a very low price, and at risk of getting delisted on an exchange.
Read More: Beginner’s Guide to Reverse Stock Splits
There are three dates that are important when it comes to stock splits.
The announcement date is the day that the board of directors will announce the stock split and all of the important details, such as the split ratio, record date and effective date. The record date is the date in which investors need to own the shares in order to be included in the stock split. The effective date or the split pay date is the date when the shares will show up in the investor’s accounts.
Effective Date/Split Pay Date
This date is when the split takes effect. This is the day that the investors will be granted the extra shares. It might take a few days for those shares to appear in their accounts.
This is the execution date of the split–the day that the new price goes into effect. Normally, this date directly follows the split pay date.
How To Know When a Company Has a Stock Split
There are a few ways to get information about stock splits and when they’re going to happen. One of the most common ways is a stock split calendar. A stock split calendar commonly includes:
- The ex-date
- Distribution date
- Recorded date
- The announcement date
The Benzinga Pro Stock Splits Calendar includes all of that and an analysis of the company’s stock split. You can start a free, two-week trial to try the stock split calendar.
Stock splits are neither good nor bad. Sometimes, they are necessary to make shares more liquid. Stock splits create shares by dividing already available shares. To ensure investors are well educated and prepared for the split, taking note of the important dates and announcements is very important, so you know what is happening to your portfolio.
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