What is split stock. Explained on the fingers

The company’s shares are traded on the stock exchange, but they are expensive and not available to many private investors. In such a case, a split can be used and the shares can be purchased for a lower price. We tell you what the procedure looks like and why companies need it.

What is a split

Split, or stock split, is an increase in the number of the issuer’s securities traded on the market due to a decrease in their value while maintaining capitalization at the same level. The company splits a share into several new ones to increase the liquidity of the securities.

No issue is made during the split. The percentage shares of the shareholders remain unchanged. The procedure is carried out in relations – for example, 2 to 1, 6 to 1, 20 to 1. As an example, let’s take the ratio 2 to 1: if there were 100 thousand shares in circulation, after the split there will be 200 thousand, but each of the securities will cost twice as cheap. An investor who had ten shares of the issuer that split will now own twenty shares, but in total they will have the same value as before.

Why do you need a split

A company grows and develops, and over time the value of its shares begins to increase. Securities may become so expensive that they become unattractive or even unaffordable for ordinary investors.

The split increases the liquidity of shares on the stock market. The split method makes it possible to attract new investors.

An increase in the number of shares outstanding can also lead to a decrease in the spread, i.e., a narrowing of the difference between the best offers to buy and sell a security.

The split does not have a direct effect on the share price, but an indirect effect is possible – investors’ interest in the issuer increases.

Who«splits»

Among recent examples of companies that have decided to go for a stock split is Google. The 20-to-1 split was announced in parent company Alphabet’s financial report and is still pending shareholder approval.

Over the past two years, tech giants have made the split: in 2020, Apple (4-to-1) and Tesla (5-to-1), and in 2021, NVIDIA (5-to-1). Apple (4 to 1) and Tesla (5 to 1), and NVIDIA (5 to 1) in 2021.

Companies can split shares more than once. For example, this was the fifth split for Apple. Walmart has done 11 2-to-1 splits since its IPO.

Reverse split

If a company decides to reduce the number of its shares outstanding and increase their price, it has done a reverse split. Similar to a normal split, the market value of the issuer will not change. For example, this is possible when a company’s share price has declined so much that it has reached a level at which it can be delisted from an exchange for failing to meet the minimum required value.