The decision to split shares ( English Stock Splits) is usually used when a company's management realizes that its stock price is becoming too high. Share splits are carried out to increase their liquidity (the number of shares in circulation increases) and to make them more accessible to investors when purchasing in standard lots of 100 shares. This allows the company to maintain the market price of its shares in the optimal range.

Impact of stock splits on stock price

A stock split increases the number of shares outstanding and decreases the par value and market price of the share. For example, a split with odds of 5 to 1 will increase the number of shares outstanding by 5 times, and the par value and market price of one share will decrease by 5 times. At the same time, the existing shares of shareholders will not change, nor will the total market value of the shares they own.

From a purely economic point of view, stock splits should neither increase nor decrease the company's market value, but a number of empirical studies have revealed some patterns.

Investors perceive the decision to split as a sign that the company's management expects a further increase in the market price of the stock and thus prevents it from going beyond the optimal range. Therefore, for some time after the split, the market price of the stock will usually increase. However, if in the future the company does not demonstrate profit growth, in particular, growth in earnings per share ( English Earnings per Share, EPS), the market price of the stock will generally decline.

Advantages and disadvantages

The main advantage of splitting shares is the increase in their number in circulation, which automatically leads to an increase in shares in free float ( English Free Float). Combined with the fact that splitting leads to a decrease in the market price of shares, this makes them more accessible to investors, and, consequently, increases their liquidity.

A negative consequence of stock splits is a relative increase in the broker's commission. As a rule, the commission for buying or selling one standard lot is fixed, so for the investor, transactions with “expensive” shares will be cheaper than transactions with “cheap” shares. Let's say that the broker's commission for 1 standard lot is $10, and the investor intends to invest $15,000 in the purchase of shares. There are two alternatives on the market: shares of Company A at a price of $150 and shares of Company B at a price of $5. Thus, an investor can buy 1 standard lot of Company A shares ($150 × 100), for which he will pay a commission to the broker of $10. For Company B shares, the cost of a standard lot will be $500 ($5 × 100), that is, the investor will be able to purchase 30 standard lots ($15,000 ÷ $500). However, in this case, the broker’s commission will be $300 ($10 × 30).

Example

Let's assume that the market price of a company's shares reaches $80. The company's management believes that this price level is too high for investors and decides to split the shares in a ratio of 4 to 1.

For each share, existing shareholders will receive 4 shares of the company with a market value of $20, and the number of shares outstanding will increase by 4 times. Let's say that the number of shares outstanding at the time of the split was 200,000, therefore the market value of the company was $16,000,000 ($80 × 200,000). After crushing, their number will increase 4 times and amount to 800,000 units, and the market value of the company will remain unchanged at $16,000,000 ($20 × 800,000).

Share split- a method of attracting additional investors by deliberately lowering the market price of a share and proportionally increasing the number of shares in circulation.

Share split or stock split used by joint stock companies to make shares more attractive to private investors. But companies do this not with the help of advertising, but with the help of an artificial reduction in the market price.

Capitalization does not change

To understand stock splits, you need to understand the commutative law of arithmetic: changing the places of the terms does not change the amount. The amount in this case is the market capitalization of the company (i.e. the total value of all shares). In other words, no matter how the number of shares and the price changes, during a split, the market capitalization remains unchanged.

Example of a stock split

The best way to demonstrate split is with an example. Let’s say there are 1 million shares of AAA company in circulation on the market, the cost of which before the split is 1000 UAH. To make a share cheaper, our fictional company AAA decides to split or split its shares in a ratio of n to 1. (The concept of a ratio or ratio is inherent in the split itself. Splits are often 5 to 1, 2 to 1, etc.) Thus, split affected the market in the following way:

• the number of issued shares increases n times
• the market price of the stock is divided by n

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Thus, if the split was 5 to 1, then all shareholders would see in their terminals that they own 5 times as many shares. But at the same time, the market price of each share would be reduced by 5 times, and would amount to 200 UAH. Capital did not change after splitting, because 10 shares for 1000 UAH. equals 50 shares at 200 UAH.

Why do you need a stock split?

Usually, the need for a stock split occurs when the stock price is very high, or significantly exceeds the stock prices of industry competitors. Obviously, for most private investors a share is worth 1000 UAH. won't be very attractive. And if many investors refrain from investing their funds in a company, then this naturally has a negative impact on both the market value and the liquidity of the stock.

In other words, by cutting off the layer of private investors, the company deprives itself of access to large capital. But in order to regain liquidity and demand from an additional niche (i.e. private investors), companies are resorting to stock splits.

After the split the stock grows

When the price of a stock decreases, investors who were previously out of reach begin to buy it, thereby increasing demand. Increased demand will push the stock price up. Thus, after a split, the stock price rises In most cases.

Impact of splitting on the price chart

Obviously, if a potential investor, studying a stock on the chart, sees a sharp drop from 1000 to 200 UAH, he will be quite skeptical about this stock and is unlikely to consider it as a potential investment. Moreover, those shareholders who did not find out about the split in time will be upset (to put it mildly) and will arrange bedlam at the market, if they find out that the stock collapsed 5 times overnight.

Well, really, would it be fair to show such a monstrous decline on the graph, which, in fact, is not real? After all - we must remember - market capitalization does not change due to splitting.

A stock split leads to a decrease in their value in proportion to the split. The proportions of the split depend on the goals of the company’s management and the market situation. For example, in 2017, Apple carried out a 7-to-1 stock split that reduced its stock price from $650 to $92.

Why do stock splits take place?

A split allows you to attract the attention of private investors with small capital to the company's shares. Demand from private investors and traders increases the liquidity of the stock and provokes an increase in its quotations.

Stock splits are most often carried out by young and fast-growing companies. A split is perceived by investors as a trading signal to buy, since after the split the price of shares increases or the amount of dividends paid by the company increases. The informational effect of a split is to form an opinion among traders and investors that the stock is undervalued.

When conducting a split, the following rules must be observed:

• an increase in the number of shares should not lead to a change in the capitalization of the company or the authorized capital of the joint stock company;
• as a result of splitting, fractional shares of shares should not be formed in the investment portfolios of holders;
• restriction of shareholders' rights as a result of splitting is unacceptable.

Impact of a stock split on investment returns

• cost of one share;
• the number of shares owned by the investor.

Reverse stock split

The reverse split procedure is most often carried out to remove a company from the category of securities "penny stock" - shares under five dollars.

A reverse split is a negative signal for investors and indicates financial problems of the company. According to statistics, after a reverse split, the price of shares decreases by 30% over the next two years.

of the company is converted into two or more shares of the company of the same category (type). At the same time, appropriate changes are made to the companies regarding the par value and number of authorized shares of the company. Yes. carried out by decision of the general meeting of shareholders.

Economics and law: dictionary-reference book. - M.: University and school. L. P. Kurakov, V. L. Kurakov, A. L. Kurakov. 2004 .

See what "SHARE DIVISION" is in other dictionaries:

Crushing, split of shares- Share splitting. Occurs when a firm issues new shares and at the same time reduces the current market price of each share to a level proportional to the pre-split price level. For example, if an IBM share was worth $100 before the 2-for-1 split, then after... Investment Dictionary

CRUSHING, SPLITTING- SPLIT UPIncreasing the number of shares of the corporation in a certain proportion; dividing an existing share of a corporation into several new ones with a reduced par value or stated value (conditional valuation of shares for accounting purposes. Note... ... Encyclopedia of Banking and Finance

Stock split- STOCK/SHARE SPLIT Issue of new shares with a lower par value to replace shares of previous issues. An increase in the number of shares of a company does not entail a change in its capitalization. For example, a double split of shares with a par value of Ј1 (two shares for one)… … Dictionary-reference book on economics

Stock split- (STOCK SPLIT) is similar to paying dividends in shares. An operation that leads to an increase in the number of shares held by shareholders in proportion to their share in the capital. A stock split results in a reduction in the par value of a share while simultaneously replacing each... Financial glossary

splitting, division of shares- An increase in the number of shares held by shareholders without changing the size of the share capital (equity) or its market value (market value) at the time of division. When splitting shares, also called split up, the price of one share falls: if... ... Financial and investment explanatory dictionary

The procedure for converting each share of any issue into two or more shares of the same category (type). Question about D.a. is placed when the nominal value of the shares of a joint-stock company turns out to be unjustifiably enlarged, which entails... ... Encyclopedia of Lawyer

SHARE SPLIT- (eng. stock split) – conversion of one outstanding share of a joint stock company into two or more new shares of the same category (type). Produced in accordance with the Federal Law “On Joint Stock Companies” (1995 as amended in 2001) by decision of the general... ... Financial and credit encyclopedic dictionary

The term split in the stock market usually refers to the operation of splitting shares. What kind of operation is this, and for what purposes is it carried out? Let's go in order.

A stock split involves dividing each existing share of a company into two or more shares. For example, when dividing by two, one old stock produces two new shares. The price of new shares will be two times lower than that of old ones. Thus, owners of old shares will receive twice as many new shares, the total value of which remains the same.

During a split, there is no new issue of shares, and the company's market capitalization, as well as shareholders' interests in it, remain unchanged. But at the same time, the availability of shares to a wider audience of traders increases, which has a positive effect on them.

As a simple example of a split, let's look at the stock of a fictitious company called Split & Co. This company has grown from a garage cooperative into a global industry giant and the value of its shares has risen from a few dollars to $5,000 a share. The company's market capitalization is $10 billion and there are 2 million shares issued.

Such a high cost of the company's securities obviously cuts off a huge part of potential shareholders in the form of private investors and traders. Thus, the company's shares lose an entire niche in the stock market, which negatively affects their liquidity and even their value.

In this regard, the company's management decides to split the shares in a ratio of 1 to 5. After this procedure, the price of one share began to be $1,000. The number of shares in circulation increased to 10 million, but the company's market capitalization remained the same: 10000000x1000 = $10 billion.

As a result of such a move, as a rule, liquidity increases, demand for shares grows, as well as their price (and, consequently, the market capitalization of the issuer). Firstly, demand is growing from that category of investors who previously could not include them in their portfolio due to their high cost. And secondly, after a split, traders often join in wanting to make money on the fact that stocks after a split, as a rule, steadily rise in price.

To be fair, it is worth noting that not all companies strive for this kind of democratization of their shares. For example, shares of the famous Warren Buffett's company, Berkshire Hathaway, have a value of $313,725. Take a look at their chart for 08/22/2018:

Buffett himself explains this position by the fact that he views his shareholders as a kind of closed club of business co-owners and does not want his assets to turn into another means of profit for stock speculators.

What is a reverse stock split or consolidation?

Sometimes some companies have the opposite need, they need to increase the value of each share. Basically, this situation arises in connection with the requirement of most exchange platforms for the minimum cost of traded securities. Exchanges don't want to get involved with penny stocks.

In this case, in order to get into (or in order not to fall out of) the issuing company resorts to a reverse stock split.

Let's say that the exchange does not allow shares priced below $10 to be listed, but our fictitious company with shares priced at $7 per share really wants to list them on this exchange.

Then the company's management decides to consolidate shares in a ratio of 2 to 1. After this, the cost of the company's shares becomes equal to $14, and they have a chance to be listed on the stock exchange.

Just as in the case of splitting, when consolidating shares, neither the market capitalization of the company changes (the value of shares increases by n times, but at the same time their number decreases by the same n times), nor the shares of its shareholders.

World practice shows that a reverse split usually leads to negative share price dynamics. According to statistics, this decrease can last up to two to three years and amount to about 25-30%. Therefore, I would not recommend buying shares after consolidation, but short selling futures on them is another matter.

How does a stock split affect price charts?

Imagine the panic of an investor who, for some reason, was not aware that the company in which he owns shares decided to split its shares. Well, a man was resting on a desert island in the middle of the Pacific Ocean, simultaneously turning off the Internet, telephone and other means of communication. It would seem that it doesn’t happen to anyone? And this panic will most likely arise after our Robinson, having returned to the bosom of civilization, looks at the price chart of his shares.

The price chart will naturally show a price collapse the number of times the shares were split. And until our investor sees that the number of his shares also did not increase in the same ratio in which their price fell (and their total value remained approximately at the same level as it was), he, perhaps, will not calm down.

To avoid this kind of excesses, the concept of an adapted price was introduced (it is highlighted in red in the figure above). The adapted price divides the entire previous price chart before the split by the factor at which the split is carried out. Thus, visually, the graph becomes more convenient for perception and analysis.