What Happens When Stocks Split

Stock splitting is one of the best things that canshares so that each company has fewer shares
happen to an investor. When a stock splits, thenthan before. Such reverse splitting is very
the stockholders would receive twice as manyuncommon, but it may be used if the company
shares as before. Though the volume of thefeels that the price per share is so low that it
shares would almost double, the value of eachreflects as a bad investment to their investors. A
share would be reduced. Supposing a companyvery low share value could also entail delisting
splits its stock two-for-one, i.e. it issues one newfrom the stock exchange, or it may simply be a
share on each existing one, then the value ofway of the company to go private.
each share would be reduced to half. Thus theDue to the lower prices, the companies build up
number of shares would become twice as before,more liquidity by splitting their stocks. Lower
but the total value would remain unchanged. It'sprices mean more possibility of selling the stocks
something like getting two five-dollar bills in placesince the investors could place them better within
of a single ten-dollar bill. The value would remaintheir budgets to buy them. However, high share
the same, but the bulk of paper would becomeprices could be intimidating to the investors.
twofold.One more advantage of stock splitting is that it is
Sometimes an investor may feel a stock to beperceived as an indicator of a bullish market. If
quite beyond his/her reach due to the high pricethe stock prices are increasing, it might mean that
per share of the stock. But when the stock splits,the company is doing well financially. The rally
then the reduced value becomes much morearound the stock could last for a short time after
affordable to the smaller investors. A $100 sharethe splitting, but generally it pulls itself back to
could seem to be too much to invest in, but if itnormal quite fast.
is split two-way, then the $50 stock would seemBut a stock splitting could also cause the investors
to be more affordable. This is the reason whyto raise their hopes about the company's
companies go ahead and split their stocks. It playspotentials. Therefore the company would need to
favorably on the psychologies of their investorslive up to the standards the investors have come
and they build on more capital.to expect, or they risk losing investor confidence.
There are a number of ways in which companiesIn conclusion, we can say that a stock split does
split their stocks. The most common ones arenothing to improve or worsen the performance
two-for-one, three-for-two and three-for-one.of the company. It may look like a great deal of
There can also be a reverse splitting of theshares considering sheer bulk, but there is no
stocks; i.e. reducing the number of outstandingchange to the face value of it all.