What is Split and How is it Different from Buying or Selling in the Stock Market?

If you’re an investor and plan to join the stock market, you’ve probably heard of the split and how it affects stock prices. A stock split is a corporate action in which the total number of a company’s outstanding shares is increased by issuing more shares to the public. Splits can occur multiple times for one company and when they do, the share price is lowered and the number of shares outstanding increases. When a share is split, it incrementally dividers the price of each share without changing the company’s overall market value.

But what does that actually mean and how does it benefit investors? This article will discuss how split works, the major reasons behind it, the potential risks and benefits associated with it and some examples of recent splits among well-known companies.

What is a Split?

Investopedia defines stock split as “A corporate action in which a company divides its existing shares into multiple shares. If, for example, a company declares a two-for-one stock split, the current shareholders would receive double the number of shares from that point forward, but the value of their investment would remain the same.” Simply put, “a stock split is when a company issues more shares, but each have a lower face value.”

To better understand the concept of a stock split, let’s take an example of a company that’s worth $30 per share. The corporate board may decide to split the stock three-for-one. So now three new shares enter the market for each existing one, lowering their face value to $10 each. There won’t be any increase in the total market value of this company as it will remain at $30 per share, but investors will own three times as many shares as they’d originally purchased.

Why Do Companies Split Their Stock?

Companies like to keep their share prices within a certain range, balancing low prices with relatively high values. When a single share hits a high cost, companies are more willing to issue a split so that they remain accessible to more investors. Thus, price makes the stock split decision far easier than say, an increase in dividend distribution. Other reasons for splitting include:

• Low Share Prices: By issuing a split, companies can unify their dividend payouts among shareholders and encourage new investors to enter into their stock. Consequently, many companies with low stock prices opt for a split to make their shares more attainable for more people.
• Increase in Trading Volume: When share prices get too high, some investors may find them too costly to purchase significant quantities. As a result, some investors may shy away from buying these stocks.Stock splits help create more volume in trading stocks by increasing their liquidity and making them more desirable.
• Boosting Investor Confidence: Investors tend to view stocks with higher trading volume more favorably than those with limited or low volume. This suggests that stock splits can also help companies in boosting investor confidence by increasing its trading volume.

Are There Any Risks Associated with Stock Splits?

When it comes to investing in stocks, there are always associated risks. Although stock splits have several benefits, there’s no guarantee that they will necessarily lead to positive returns in the long run. Here are some potential risks associated with stock splits:

• Shortterm Volatility: A widespread surge in the demand for stocks after a stock split can result in short-term volatility. This often leads to investors being overwhelmed by the noise and panicking over short-term trends in order to sell their shares off quickly before they are affected further by market corrections or bearish trends.
• Split Flops: Investors that take on stock splits tend to believe that they can easily make money off of these stocks without understanding why the split was issued in the first place. The stock prices tend to recover after a few weeks and many investors fail to time this correctly and end-up confused on why the stocks are going down instead of up after a split.

How Can Investors Benefit from Splits?

Stock splits are usually started by companies that have seen tremendous success in their respective industry and whose share prices tend to rise rapidly. By splitting up their stocks into smaller increments, companies give their new investors an opportunity to buy in at lower prices while existing shareholders get an increase in dividends. Some stocks that previously had too high of a cost may now be more accessible to everyday traders, too.

For investors, this gives them an opportunity to diversify their portfolios by adding a stock that they’d otherwise be unable or unwilling to purchase due to its price tag. It also allows them to generate income through dividend payments as well as capital gains over time while they own the stock. Splitting can also help reduce transaction costs since it allows investors to buy more shares at lower prices instead of buying fewer expensive ones.

Recent Stock Splits

Recently, many well-known companies have chosen to implement a split on their stocks. Here are some examples of those companies and details about their splits:

• Apple Inc (AAPL): In 2014, Apple issued a 7 for 1 stock split. This meant that one share became seven and each share was now priced at $92 instead of the then current $648 per share.
• Amazon Inc (AMZN): Amazon issued a 3 for 1 stock split in 1998 making one share worth $45 instead of its previous $137 value.
• Facebook Inc (FB): In 2020, Facebook issued a 5 for 1 stock split and one share now cost $182 instead of the then current $920 value.

These 3 examples illustrate how companies have chosen various ratios in order to reduce the value of individual shares without altering their total market value.

Final Thoughts

Investing in stocks can be both risky and rewarding depending on certain factors like market conditions and investor strategy. When it comes to participants in the stock market’s decision-making process, issuers get ahead by considering stock splits in order to make their stocks more accessible to potential investors while existing shareholders benefit through dividends resulting from higher trading volumes post-splitting.

While stock splits tend to lower share prices and increase the number of stocks traders can buy, caution should be taken since there are potential risks associated with this process such as shortterm volatility and potential “split flops.” For investors looking for new opportunities or wanting an insight into how much demand there is for certain stocks should consider studying recent splits among prominent companies as examples as to how they may be able to benefit from them in their portfolio as well.

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