- Stock split
A stock split or stock divide increases the number of shares in a
public company. The price is adjusted such that the before and after market capitalizationof the company remains the same and dilution does not occur. Options and warrants are included.
Take, for example, a company with 100 shares of stock priced at $50 per share. The market capitalization is 100 × $50, or $5000. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25. The market capitalization is 200 × $25 = $5000, the same as before the split.
Ratios of 2-for-1, 3-for-1, and 3-for-2 splits are the most common, but any ratio is possible. Splits of 4-for-3, 5-for-2, and 5-for-4 are used, though less frequently. Investors will sometimes receive cash payments in lieu of
It is often claimed that stock splits, in and of themselves, lead to higher stock prices; research, however, does not bear this out. What is true is that stock splits are usually initiated after a large run up in share price.
Momentum investingwould suggest that such a trend would continue regardless of the stock split. In any case, stock splits do increase the liquidityof a stock; there are more buyers and sellers for 10 shares at $10 than 1 share at $100.
Other effects could be psychological. If many investors believe that a stock split will result in an increased share price and purchase the stock the share price will tend to increase. Others contend that the management of a company, by initiating a stock split, is implicitly signaling its confidence in the future prospects of the company.
In a market where there is a high minimum number of shares, or a penalty for trading in so-called
odd lots (a non multiple of some arbitrary number of shares), a reduced share price may attract more attention from small investors. Small investors such as these, however, will have negligible impact on the overall price.
Effect on historical charts
When a stock splits it is shown on many charts similar to a
dividendpayout, and therefore does not show a dramatic dip in price. Taking the same example as above, a company with 100 shares of stock priced at $50 per share. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25. Based on this example you might expect to see the stock dropping from $50 to $25. This would cause chaos in the market as investors would panic if they did not take time to realize that there was a stock split. So what is done is something called adjusted close price. This adjusted close price will take all the closing prices before the split and divide them by the split ratio. So when you look at the charts it will seem as if the price was always $25. Both the Yahoo! historical price charts [ [http://finance.yahoo.com/q/hp?s=CI&a=05&b=1&c=2007&d=05&e=8&f=2007&g=d Yahoo Finance Historical Charts] ] and the Google historical price charts [ [http://finance.google.com/finance/historical?cid=6276&startdate=Jun++1%2C+2007&enddate=Jun++8%2C+2007 Google Finance Historical Charts] ] show the adjusted close prices.
Reverse stock split
Share repurchasealso known as stock buyback
Berkshire Hathaway, which has never had a stock split, has at times been valued at over US$140,000 per share.
* [http://www.stocksplits.net/1splits.htm Stock split calendar showing prices pre-split and post-split]
* [http://www.sinletter.com/blogComment.aspx?id=103 Profiting From Special Situations Like Stock Splits]
* [http://biz.yahoo.com/c/s.html Stock split calendar for U.S. companies]
* [http://www.essortment.com/home/financialdefini_seur.htm Stock split and reverse split examples for shareholders]
* [http://www.aktiensplits.ch/?Splitkalender Swiss stock split calendar for European companies and worldwide companies incl. U.S. companies (in German)]
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