why does a company split its stock

For example, a company which has 100 issued shares priced at $50 per share, has a market capitalization of $5000 = 100 $50. If the company splits its stock 2-for-1, there are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25 = $5000 / 200. The market capitalization is 200 $25 = $5000, the same as before the split. Ratios of 2-for-1,
3-for-1, and 3-for-2 splits are the most common, but any ratio is possible. Splits of 4-for-3, 5-for-2, and 5-for-4 are used, though less frequently. Investors will sometimes receive cash payments in lieu of fractional shares. [ that stock splits, in and of themselves, lead to higher stock prices; research, however, does not bear this out. [ What is true is that stock splits are usually initiated after a large run up in share price. would suggest that such a trend would continue regardless of the stock split.


In any case, stock splits do increase the of a stock; there are more buyers and sellers for 10 shares at $10 than 1 share at $100. Some companies have the opposite strategy: by refusing to split the stock and keeping the price high, they reduce trading volume. is a notable example of this.


Other effects could be psychological. If many investors believe that a stock split will result in an increased share price and purchase the stock the share price will tend to increase. Others contend that the management of a company, by initiating a stock split, is implicitly its confidence in the future prospects of the company. In a market where there is a high minimum number of shares, or a penalty for trading in so-called (a non multiple of some arbitrary number of shares), a reduced share price may attract more attention from small investors.


Small investors such as these, however, will have negligible impact on the overall price. The reason to do a stock split is to get the price of the stock down to an affordable range. If your stock costs $100,000 per share, you are seriously cutting in to the number of people who can afford to buy it. I can think of two reasons NOT to do a stock split. The biggest is, Why bother? If your stock is trading at a reasonable price, why change anything? It takes time and effort, which equals money, to do a stock split.


If this serves no purpose, you're just wasting that effort. The other reason is that you don't want to drive your stock price down too low. Low prices are normally associated with highly speculative start-up companies, and so can give a wrong impression of your company. Also, low prices make it difficult for the price to reflect small changes. If your stock is trading at $10. 00, a 1/2 of 1% change is 5 cents. But if it's trading at $1. 50, a 1/2 of 1% change is a fraction of a penny. Does it go up by that penny or not? You've turned a smooth scale into a series of hurdles.

  • Views: 45

why does a company buy back shares
why do we need the stock market
why do we have the stock market
why do we invest in the stock market
why do the prices of stock shares change
why do stocks open at different prices
why is preferred stock referred to as a hybrid security