A stock split is when shares in a company are divided into multiple new shares without devaluing its market capitalisation.
- Stock splits can be used by a company when its share price is too high as a way to appeal to new investors.
- When a stock split occurs, a company’s market capitalisation stays the same, as does the value of each shareholder’s stake.
- A stock split is when a company divides its shares into multiple new shares, lowering its price, while keeping its value the same.
What is a stock split?
A stock split is when a company issues new shares to its existing investors. Also known as a forward stock split, the process is often used when a company’s share price rises substantially and ultimately becomes too ‘expensive’. When a company decides to use a stock split, its valuation and market capitalisation stays the same.
Put simply, a stock split is exactly what it sounds like and each share in a company is ‘split’ into new ones. When a stock split takes place, the value of each share becomes much cheaper. However, this does not affect shareholders, as the value of their investment stays the same, just in smaller ‘chunks’.
For example, Company X announces a 2-for-1 split. Its share price is currently £10. Following the stock split its share price is cut in half to £5. However, shareholders will now own 2 shares for every 1 they previously held, meaning the value of their investment and that of the company, stays the same.
Why do companies use stock splits?
The main reason most companies decide to use stock splits is to attract new investors. A business that is experiencing rapid growth may find its share price has become too ‘expensive’ and decide to use a stock split to make it more accessible to a wider range of investors.
Google, for example, announced in February 2022 that it had decided to use a stock split after a single share in it rose to nearly $3000. It plans to offer a 20 – 1 split, meaning each share will be split into 20 new ones. Existing shareholders will not see their investments drop in value, but will see the number of shares they own increase.
The stock split will make Google more affordable for many investors. While its share price trades at $3000, not many investors can, or will, pay such a large amount for a single share in a company. However, after the split, its share price will be some 20x lower and cost just a few hundred dollars, which is much more affordable to many. After the stock split, Google will hope its new affordable share price will drive new investment into the company.
Where can I learn more?
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