An Introduction to Stock Split


As an investor, you most probably have heard the term “stock split”, especially if you’re investing in a publicly traded company. 

Let us give you an exact definition of what a stock split is and why it is practiced by companies.   

stock split concept stock prices on LCD

What is a Stock Split?

A stock split is also knows as a forward stock split. It’s called scrip issue, bonus issue, capitalization issue, or free issue in the UK.

When stock split happens, a company’s board of directors comes into a unanimous or majority decision to increase the number of outstanding shares , through the method of issuing more shares to current shareholders. It divides its existing shares into multiple shares in order to boost the liquidity of the shares.

Doing a stock split can prove to be a good strategy, but it does not directly increase the value of the shares in question. It basically helps change the company’s stock price but not the company’s total market value. 

Why companies like doing Stock Splits

Every company can have different reasons for doing stock splits.

During situations where in a company’s stock price rises, this is usually perceived as something good. But this also has a downside. For instance, a stock that has gone up in price too much will make it hard for investors to buy any more.

This is when stock splits come in. When companies are faced with the sort of situations stated above, they can then resort to the method of splitting individual shares of stock to help lower the price of each stock.

Lower priced stocks that have recently been doing well have a higher probability of attracting more investors without the actual problem of taking a financial hit.

Liquidity also plays a role in causing stock splits. A stock’s liquidity also helps in attracting potential investors. This is because if a company’s price per share is too high, buying the stock will be a riskier prospect since it will be harder to sell shares that costs more. However, if the opposite happens and the price of a share goes down, it will be easier to liquefy.

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