Courtney Myers Blog | What is a Stock Split? The Basics Investors Need to Know | Talkmarkets

What is a Stock Split? The Basics Investors Need to Know

Date: Wednesday, September 19, 2018 11:28 PM EDT

There are myriad terms that define the investment world. Especially for someone who is a novice in this pursuit, they can often be difficult and confusing to navigate. One such term is “stock split.” You may have heard this term in the news or via online stock market channels and wondered what it means. What is a split, exactly, and is it a good thing?

In short, a stock split occurs when a publicly-traded company’s leadership determines it is time to increase the number of shares issued to current shareholders. This, in turn, ups the number of outstanding shares associated with the company. For example, one of the most common types of stock split is a 2-for-1 split, wherein an additional share is given to a recipient who currently only holds one share in the company. As a result, the number of currently outstanding shares available for that given company is doubled as well.

What Does a Stock Split Affect?

One of the major elements affected by a stock split is the price of the stock itself. This goes back to the simple logic of supply and demand. When shares are more readily available and easy to come by, as happens after a split, there is less competition amid prospective shareholders. This causes the price of the stock to decrease in most cases.

In the aforementioned 2-for-1 split, for instance, the share price would be essentially cut in half. This balanced change in ratio means that although there are fluctuations in price, the capitalization is able to stay constant.

What Catalyzes a Stock Split?

Often, company leaders will meet and determine that their share prices have reached an unmanageable level. There is usually one of two reasons behind this. Either the prices have become too high in general or they are not in keeping with the share prices of other similar firms in the same industry. As this can discourage investors from taking a chance at a small company, business leaders will take steps to incrementally lower the share price to make it more attractive and affordable. While this is a tactic that startups and small businesses employ to improve their market performance, it is important to note that even major corporations have a history of stock splitting. Consider, for instance, the IBM split history. The first split occurred in 1964 on a 5-4 basis, catalyzing a pattern that continued steadily until the late 1990s.

1 2
View single page >> |
Disclaimer: This and other personal blog posts are not reviewed, monitored or endorsed by TalkMarkets. The content is solely the view of the author and TalkMarkets is not responsible for the content of this post in any way. Our curated content which is handpicked by our editorial team may be viewed here.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.

Following (5)

Followers (1)

Stocks I follow

General Stats

Article Comments

Received: 2
Created: 0