Division of company shares or split on the stock exchange, how the stock price reacts to this event
If you have analyzed the stock price of leading companies, you have probably wondered why at a certain point in time there was a sharp drop in the value of securities?
At the same time, no one reported the collapse of the company, although the value of its shares decreased several times. The whole point here is the division of shares or, as this process is also called, a split of securities.
A stock split (or stock split) is a process in which a company divides its existing shares into several new shares, leaving the company's total market value unchanged.
This is a popular practice in the stock markets, used by companies to make their shares more accessible to a wider range of investors.
How does a stock split work?
When a company announces a stock split, it may split one share into two or more. Splitting one into two new securities is called a 2:1 split, which means each existing stock becomes two new ones.
As a result, investors have twice as many shares, but the value of each of them decreases proportionately. However, the total value of their portfolio remains the same.
Example: Let's say you had one share of a company that was worth $100. After the 2:1 split, you will have two shares, each worth $50. This leaves the total value of your shares at $100.
Reasons for doing a stock split
Companies do stock splits for a variety of reasons. The main ones include:
Decline in share price : When the price of a single share becomes too high, it can discourage new investors. Splitting shares lowers their price, making them attractive to buy.
Increased liquidity : Reducing the price of shares due to a split can attract more participants to the market. This helps to increase trading activity and stock liquidity.
Attracting Small Investors : Highly priced stocks may not be available to small investors. A split makes stocks more accessible to people who have less capital to invest.
Types of Stock Splits
Regular split : For example, 2:1, 3:1 or even 10:1. In the case of a 3:1 split, the shareholder receives three new shares for every old one. Thus, the total number of shares is tripled.
Reverse split : This is the opposite of a regular stock split, where several stocks are combined into one. This is done to increase the stock price, especially if it is too low. A reverse split can be carried out in a ratio of, for example, 1:5, which means that every five shares are combined into one.
Examples of famous stock splits
Apple : One of the most famous stock splits was in 2020 when Apple did a 4:1 split. This lowered the price of one share and made it interesting for investors.
Tesla : In 2022, Tesla also carried out a 3:1 split, reducing the price of securities by three times.
As a rule, after a stock split, the price of a given asset begins to rise; there is a psychological factor at work here. The investor remembers that 1 share cost $1,000, but now it’s only $200, and buys the security.
Share splits (Splits) are a useful tool that companies use to manage their shareholder base and maintain attractiveness in the market. While this does not change the overall market value of the company, it does make shares more accessible and liquid , which can have a positive impact on trading activity and attracting new investors.