How do stock splits work?

126 views
0

How do they work? Why is it generally good that a company does a stock split? If a pending split is announced, why does every start buying instead of waiting?

Let’s say there’s a company with shares at $100 and they do a 4 to 1 split, and I happen to own 10 shares. ($1000 value)

Do my shares multiply by 4? Does the value stay the same per share? Or the same for my total share? IE: I now have 40 shares, but their value dropped to $25 each, meaning I still have $1000 worth.

In: 1

You have technically have the same value, but your shares would now be 40. This usually implies that a company is doing well and they want to increase their liquidity.

If you have one stock worth $1000 split 4:1 then you have 4 stocks worth $250 after the split.

It basically keeps individual stock prices to sane levels so you don’t have $100,000 stocks.

Technically it doesn’t affect price, but when the board decides to do a split it’s a vote of confidence that the stock price will continue to increase, because stocks worth small dollar amounts psychologically look bad. And reverse splits look really bad as it indicates the board feels the stock price isn’t going to recover.

So people tend to buy in after a split is announced as it’s often interpreted as a signal of a healthy expanding company.

Back in the day, a company had sold ten million shares, of which you bought ten. So you own one millionth of the company.

The company’s been doing well and is now valued at $1 billion. The company’s board thinks $100 per share looks a little pricey, and they might get more interest if that were smaller. (Also, they’re reasonably sure the company’s value won’t be going *down* anytime soon.) So they decide to issue four shares for every one that’s out there.

Post split, you own 40 shares, which is still one millionth of the company. At $25 per, your shares are still worth $1000.

It’s just slicing each share into smaller slices, so a 2:1 split means twice as many shares at half the share price. A 10:1 means 10x as many shares worth 10% of the previous value.

Whatever number of shares you own get converted to the new value, so if you had 10 shares and a company did a 4:1 split you’d now have 40 shares worth $25 each (so still $1000 total value).

2 to 1 split is the most simple, but the concept is the same for all of them.

In your 4 to 1 example, you would have 4 times the number of stock, worth ~1/4 what they were before.

Let’ say you own a stock, and you bought it a 100 bucks a share. That stock does really well, and now it’s worth say 1000 dollars a share. Its harder to sell at 1000 a share (even if it’s just an emotional/ non logical reason). So the company can do a split, and say, everyone who owns a share, now owns 2. But there are twice as many now, so the price generally gets roughly cut in half. So, with some exceptions, now your 100 dollars share is worth 500 bucks, but you have 2 of them. A 10 to 1 split you would have 10 shares worth roughly 100 each.