Saw this news item and wondering
a. what are stock splits?
b. how do splits actually help a company? i.e. Does it make them more money?
In: 0
A stock split is just adjusting how many pieces the company is split up into. Number of shares are pretty arbitrary, so sometimes a company wants to make more, smaller shares and sometimes they want fewer, larger shares.
Think of a pizza — a large pizza could be cut into 4 pieces, 8 pieces, 12 pieces, etc. So a stock split is like if a pizza with 4 slices had each cut in half to make 8 slices 1/2 the size they were previously. Same amount of pizza overall, just more manageable sizes. A reverse split is like the opposite, making fewer slices.
Companies may split because the stock gets too high in price for investors to buy in quantity. Investors often like to buy 10, 100, 1000 shares but if the stock trades for a few hundred or thousand dollars then it’s hard for many investors to buy the amount they want. Say a stock trades at $600/sh. An investor wants to invest $1,500, but has to decide if they want 2 shares for $1,200 or 3 at $1,800. If the stock splits 10:1, then the investor can buy the 25 shares at $60 to get the investment they want.
On the other hand, too low a share price means a company’s shares cannot be bought by institutional investors (most don’t buy sub-$10 stock), might be at risk of de-listing by the exchange they trade on, and sends a general perception to many investors the company is doing poorly. So a company with a stock trading at $5.35 might decide to do a 1:10 reverse split, cutting shares down to only 10% of their previous count but now each worth $53.50.
In both cases, the overall value of the company doesn’t change directly, they company has no financial gain, but the price perception might have a positive impact on demand for shares and help hold it steady or increase share price.
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