Companies often split shares of their stock to try to make them more affordable to individual investors. A stock split does not dilute the ownership interests of existing shareholders. When a company declares a stock split, its share price will decrease, but a shareholder’s total market value will remain the same. For example, if you own 100 shares of a company that trades at $100 per share and the company declares a two for one stock split, you will own a total of 200 shares at $50 per share immediately after the split. If the company pays a dividend, your dividends paid per share will also fall proportionately.
A stock may split two for one, three for two, or any other combination.
A stock split is when a company creates more shares out of existing shares and in the process reduce its share price to make the shares more affordable to purchase by shareholders and investors.
The company’s overall value stays the same while dividing its existing shares into greater number of smaller, less expensive shares.
The stock split ratios for example a 2-for-1 split means every existing share (1) is divided by 2 resulting to 2 shares. So, if you own 10 shares worth $10.00 each before the split in this hypothetical example, after the 2-for-1 split, you will own 20 shares with each share worth $5.00 each.
REASON FOR STOCK SPLITS
A stock split makes the stock more affordable for more investors and thus can be used to draw in new investors who may have been reluctant or simply unable to purchase the stock at its higher price.
The move is a useful strategy when a company’s stock price rises to a level that prices many investors out, or when the price has risen significantly higher than its competitors’ stock.
Stock splits can be a lucrative and important step for companies looking to draw in more investors. This is particularly true for companies that are experiencing rapid growth. A company that is growing or believes it will grow may choose to split their stock, giving a positive indication of growth to investors and shareholders, which ultimately helps it grow.
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