To understand how and why stock split


All publicly traded companies have a set number of shares that are outstanding. Stock split-the Board of Directors to increase the number of shares that have not been settled by the issue of shares to current shareholders.

For example, in a 2-for-1 stock split, additional shares for each share of the shareholder. So, if a company has 10 million shares outstanding before the split, i.e. 20 million shares outstanding after a 2-to-1.

The prices also depend a stock split. After the split, the stock price will decline because the number of shares outstanding has increased. Example 2-to-1, the stock price will be reduced. Thus, although the number of shares issued and changes in the price, the market capitalization remains unchanged.

Why Do Stocks Split?

A stock split is usually done by companies that have their share price increase to levels that are too high or beyond the price level of similar companies in its sector. The main motive is to make shares seem more affordable to small investors even though the underlying value of the company has not changed. This creates the effect of increasing the liquidity of the shares.

When the stock split, it could also lead to a rise in the value of shares after the decrease immediately after the split. Since many small investors think the stock is now more affordable and buy the stock, they end up increasing demand and higher prices. Another cause of rising prices is that a stock split provides a signal to the market that the company’s share price is growing and people believe that this growth will continue in the future, and again, lift demand and prices.

In June 2014, Apple. the stock split 7-to-1, to make it more accessible to a larger number of investors. Right before the split, each share is traded at 645.57$. After the split, the price per share in the open market amounted to $92.70, which is about 645.57 ÷ 7. Existing shareholders were also given six additional shares for each share owned, so an investor who owned 1,000 shares of the company’s pre-split would be 7,000 shares after the split. Apple shares increased from 861 million to 6 billion shares, but the market capitalization was almost unchanged and amounted to 556 billion USD. The day after the stock split, the price increased to $95.05 with the increase in demand from the decline in stock prices.

What is Reverse stock split?

Another version of the split stock reverse split. This procedure is typically used by companies with low share prices that would like to increase these prices or gain more respectability in the market or to prevent the company from being excluded (many stock exchanges will delist stocks if they fall below a certain price per share).

For example, in a reverse 1-for-5 split, 10 million shares at 50 cents each will now be 2 million shares at $2.50 per share. In both cases, the company is still worth $ 5 million.

In may 2011, Citigroup reverse stock split of 1 to 10 in order to reduce the volatility of the stock and discourage the speculator trade. The reverse split increased the stock price from $4.52 pre-split to $45.12 after the split and every 10 shares held by investor were replaced with one share. While the split has reduced the number of its shares outstanding from 29 billion to 2.9 billion shares, the market capitalization of the company remained at about 131 billion dollars.

How A Stock Split Affects Short Sellers?

A stock split does not affect short sellers in material form. There are some changes that occur as a result of the split that affect the short position, but they do not affect the cost of short positions. The main change that will occur in a portfolio the number of shares shorted and the price per share.

When an investor shorts a stock, he or she is borrowing the shares and is obliged to return them at some point in the future. For example, if an investor shorts 100 shares of XYZ Corp. for $25, he or she will be required to return 100 shares of XYZ stock to the lender at some point in the future. If the action is in the 2-to-1 to the stock return, it just means that the number of shares in the market will double along with the number of shares that must be returned.

When a company splits its shares, the value of the shares also twine. To continue the example, let’s say, the stock was trading at $20 during a 2-to-1; After the split, the number of shares is doubled and share, at $10 instead of$ 20. If an investor has 100 shares at $20 for a total of 2000$, after the split he or she will have 200 shares at $10 for a total of 2000$.

In case of a short investor, it initially needs 100 shares to the lender, but after the split he or she will have 200 shares at a discounted price. If the investor closes the position immediately after the split, he or she will buy 200 shares on the market for $ 10 and to return them to the lender. The short-term investor will have a profit of $500 (money received on a short sale ($25 x 100) is less than the cost of closing the short position ($10 x 200). It, 2,500 $- 2,000 $= $500). Entry price for short 100 shares at a price of $25, equivalent to 200 shares at a price of $12.50. So the short $2.50 per share on 200 shares borrowed, or $5 per share for 100 shares, if he or she sold before the split.

Bottom Line

A stock split is used primarily by companies that saw their stock prices increase substantially and although the number of outstanding shares increases and price per share decreases, the market capitalization (and the value of the company) does not change. The result of a stock split help make shares more affordable to small investors and provides greater competitiveness and liquidity in the market. (See. also: understanding a stock split.)

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