What are stock splits?
There are two types of stock split: conventional and reverse.
Conventional stock split:
A conventional stock split occurs when a company decides to divide its existing stocks into more stocks. Therefore, each individual share would be worth less, but investors would have more shares, which when combined would equate to the same value. This option leaves the underlying value of the stock and the company unchanged.
Reverse stock split:
The opposite is a reverse stock split which occurs when a company reduces the number of shares in order to increase the price of each share. As with a conventional stock split the value of the company and its shares should remain unchanged.
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Why do stock splits happen?
Companies that opt for a conventional stock split may want to lower their share price to encourage more investors to invest. A conventional stock split can also improve the liquidity of the stock. With more stocks available the easier it is to buy and sell.
Companies choosing to enact a reverse stock split may do so when their share price falls below the minimum price required to be listed on a particular exchange. Stocks that fall below this price are in danger of being delisted.
Example of a stock split
Apple has conducted a number of stock splits in its history but the most recent one occurred in 2020. Apple Inc. undertook a conventional stock split at a ratio of four for one, meaning one share became four shares, and the original share price was evenly divided into those four shares. The company went from having 12 billion shares valued at roughly US$500 to having 50 billion shares at the price of US$125. Lowering the share price made investing in Apple more accessible.
How does a stock split affect you?
Stock splits should not have an impact on individual investors. If you own a stock that splits, the value of your investment should remain the same. But, it is a good idea to understand the reason behind the stock split, as it might provide an insight to the current environment and potential future movement of your investment.
How will you be notified about a stock split?
Generally, companies will first publicly announce the plans for the stock split. Details of the split ratio and when the split will occur are usually included in the announcement. You can also expect to be personally notified via your preferred method of contact. You may want to take note of the date the stock split comes into effect, which is when the new shares will show up in your brokerage account and the company’s shares will be trading at its new stock price.