What are stock splits?

Quest: Stock splits

What describes stock splits best?

Reward:  +10 XP  0   0   0

Quest: Why would a company issue a stock split?

Why would a company issue a stock split and what might happen?

Reward:  +10 XP  0   0   0

The first is that you can’t buy half shares. You have to buy 1 whole share (or more) or nothing. When a share is trading for $100, you can’t buy half a share for $50. For example, Apple was worth $500+ in 2020. Apple issued a stock split of 1:4. If you wanted to buy shares from Apple you Needed at least $500+ to buy one. After the split, shares cost $500 / 4 = $125. Now the people that don’t have $500 but do have $125 can buy shares from Apple. Basically meaning the stock becomes more attractive for investors with smaller pockets.

Also, price has a very psychological impact on investors. Most people prefer having a higher amount of shares instead of a higher price per share. Because then you have more shares! But that does not make any sense because you still have the same amount of value. But thats how numbers work on a psychological level. For example, before the split you could only buy one Apple share for $500 now you can buy four. Four is more than one so it might seem you now have more.

Higher liquidity

A stock split might also result in higher liquidity. Liquidity means how fast a security can be bought or sold. A split causes a lower price per share which might attract more investors resulting in more availability of the shares in the market. Higher liquidity will also reduce the spread. Spread is the difference between the ask and sell price. The spread is lower because more people are trading the stock and are more likely to pay the price they want. More investors means more money for the company.

Reverse stock split

A reverse stock split can also take place. It acts the same as a forward stock split only reversed. For example, a company has 100.000 outstanding shares for $1 and issues a reverse stock split 2:1. The outstanding shares changed to 50.000 and price to $2 per share. Companies might issue a reverse stock split when the price of their shares are very low. Some exchanges require a minimum price per share or they get delisted. 

Stock splits can fundamentally change the market

Stock splits can fundamentally change the market. Stock splits tend to outperform the market for the next 12 months after the split. When a stock split takes place, the fundamentals of the company are exactly the same. The market capitalization did not change (outstanding shares * price per share). Although nothing changed, a stock split can fundamentally change how the stock is traded. 

And that makes sense because an optimal stock price can attract more investors. More investors means different behaviour in the market. This clearly shows that valuation of companies is based on psychological decisions and emotion and not based on true data. If the last was the case, the valuation of the company would stay exactly the same after a stock split because literally nothing about the company changed. They only changed the amount of stocks.

Key Concepts:

  • A stock split increases the outstanding shares and decreases price.
  • Most common split ratio is 1:2 or 1:3.
  • A reverse stock split decreases the outstanding shares and increases price.
  • When any split happens, the value of the company remains the same.
  • Stock splits are used to attract more investors, raise liquidity and to stay listed on exchanges when price per share drops to low.
  • Stock splits can fundamentally change the market.


Chapters: The Ultimate Investing Guide

Stay informed with my latest content.

Subscribe to my newsletter and receive an email as soon as I add content to PenkeTrading.com.


By clicking Register, you agree to the General Terms and Conditions.

Comments

Join the conversation.

Leave a comment
Penke's Market Notifications
HKDRUB.FOREX
3 hours ago

I found you a Oversold RSI (Relative Strength Index) on the daily chart of HKDRUB.FOREX.

HKDRUB.FOREX Daily Candlestick Chart
CHFCZK.FOREX
3 hours ago

I found you a Golden Cross on the daily chart of CHFCZK.FOREX.

CHFCZK.FOREX Daily Candlestick Chart
SUP.CC
19 hours ago

I found you a Overbought RSI (Relative Strength Index) on the daily chart of SUP.CC.

SUP.CC Daily Candlestick Chart
SDT.CC
19 hours ago

I found you a Three White Soldiers Candle Pattern on the daily chart of SDT.CC.

SDT.CC Daily Candlestick Chart
SCRT.CC
19 hours ago

I found you a Three White Soldiers Candle Pattern on the daily chart of SCRT.CC.

SCRT.CC Daily Candlestick Chart
PPP.CC
19 hours ago

I found you a Oversold RSI (Relative Strength Index) on the daily chart of PPP.CC.

PPP.CC Daily Candlestick Chart
PLEX.CC
19 hours ago

I found you a Oversold RSI (Relative Strength Index) on the daily chart of PLEX.CC.

PLEX.CC Daily Candlestick Chart
KEYT.CC
20 hours ago

I found you a Oversold RSI (Relative Strength Index) on the daily chart of KEYT.CC.

KEYT.CC Daily Candlestick Chart
HNY.CC
20 hours ago

I found you a Oversold RSI (Relative Strength Index) on the daily chart of HNY.CC.

HNY.CC Daily Candlestick Chart
HEX.CC
20 hours ago

I found you a Three White Soldiers Candle Pattern on the daily chart of HEX.CC.

HEX.CC Daily Candlestick Chart
HBC.CC
20 hours ago

I found you a Oversold RSI (Relative Strength Index) on the daily chart of HBC.CC.

HBC.CC Daily Candlestick Chart
GSWAP.CC
20 hours ago

I found you a Three White Soldiers Candle Pattern on the daily chart of GSWAP.CC.

GSWAP.CC Daily Candlestick Chart
GF.CC
20 hours ago

I found you a Oversold RSI (Relative Strength Index) on the daily chart of GF.CC.

GF.CC Daily Candlestick Chart
ESK.CC
20 hours ago

I found you a Oversold RSI (Relative Strength Index) on the daily chart of ESK.CC.

ESK.CC Daily Candlestick Chart
erowan.CC
20 hours ago

I found you a Three White Soldiers Candle Pattern on the daily chart of erowan.CC.

erowan.CC Daily Candlestick Chart
BT.CC
20 hours ago

I found you a Overbought RSI (Relative Strength Index) on the daily chart of BT.CC.

BT.CC Daily Candlestick Chart
ARRR.CC
20 hours ago

I found you a Three White Soldiers Candle Pattern on the daily chart of ARRR.CC.

ARRR.CC Daily Candlestick Chart
AKN.CC
20 hours ago

I found you a Oversold RSI (Relative Strength Index) on the daily chart of AKN.CC.

AKN.CC Daily Candlestick Chart
XTK.CC
20 hours ago

I found you a Three White Soldiers Candle Pattern on the daily chart of XTK.CC.

XTK.CC Daily Candlestick Chart
WAXE.CC
21 hours ago

I found you a Three White Soldiers Candle Pattern on the daily chart of WAXE.CC.

WAXE.CC Daily Candlestick Chart
vUSDT.CC
21 hours ago

I found you a Overbought RSI (Relative Strength Index) on the daily chart of vUSDT.CC.

vUSDT.CC Daily Candlestick Chart
THEMIS.CC
21 hours ago

I found you a Overbought RSI (Relative Strength Index) on the daily chart of THEMIS.CC.

THEMIS.CC Daily Candlestick Chart