Companies will sometimes make a strategic business move by splitting their stock. This simply means the company splits each share of its existing stock into multiple shares, which drives the price per share down. The strategy is usually meant to make their stock more attractive to a wider range of investors since the price per share is lower. And the good news for people who already have a portfolio investment in the company is they won’t be impacted since their stock’s value remains unchanged even after the split. It’s a common practice, especially among large publicly-traded companies, but it’s still important to have some financial knowledge and background on the strategy as an investor.
When Do Stock Splits Usually Happen?
There doesn’t have to be a specific set of circumstances to prompt a company to split its stock. A particular company may have introduced a new product around the same time as its stock split to make their stock more attractive for investors. Companies may also merge with or acquire different companies to the point where a stock split makes sense. Another reason is that the company simply has grown so much and the price of its stock has soared to the point where it’s unattractive for a large number of investors. Splitting stock means they can improve liquidity since more investors across the board can afford shares.
Most Common Types Of Stock Splits
Typical stock splits can be anywhere from a 2-for-1, a 3-for-1, or even as high as a 5-for-1 or more. For current investors, a 2-for-1 stock split means they will receive two shares for each owned share before the split occurred. But since the price per share decreases as well, current investors are largely unaffected. For example, if an investor owns 50 shares at $100 per share, the total value is $5,000. In a 2-for-1 stock split, the number of shares they own would now be 100 shares, but the price would be $50 each, for still a total value of $5,000.
Pros And Cons Of Stock Splits For Investors
Some of the benefits of stock splits for investors include improving liquidity, making it easier to do a portfolio rebalance, and even increasing the share price at times. After a stock split, a common investment strategy includes portfolio rebalancing since it’s easier to sell shares at the lower price with the intent of buying different and potentially more valuable shares.
Possible downsides of stock splits for investors include an increase in market volatility and potentially not increasing the share price at all. Market volatility is the main concern current investors have, though, since a large number of new investors may purchase the stock due to its affordability.
Stock Investing Info follows stock splits closely to help investors understand whether any specific investment strategies may make sense. Enhancing your financial knowledge of stock splits can help you identify whether any opportunities are available to you now or in the long-term. If you have any questions about stock splits, contact us today to speak with a professional.