Stock Split is the corporate action where a company issues additional shares to its shareholders to increase the number of outstanding shares and boost its stock’s liquidity.
Though the number of outstanding shares increases, the value of the shares remains the same and so as the company value.
Types of Stock Split:
Based on a merger or division, the stock split is divided into two types
- Forward Split
- Reverse Split
This is the strategy to break down the high-price shares into a number of low-price shares which often takes place with the shares of well-established companies whose shares are known as “Blue Chip Stocks.”
This reverse split is to improve the value of the single share by merging multiple shares into one. Thus, improving its overall share price of a single share.
How does stock split work?
Every company or business constantly searches for opportunities to increase their market price and to hold the liquidity as much as to build the asset ownership. If you’re looking for the exact play, then the stock split can be the best option to split your shares without affecting your current market value. The usual Stock Split ratio is like a 2-for-1 or a 3-for-1 split ratio. For instance, If you held a share worth $100, then with the 2-for-1 stock split, now you will have two shares worth $50 each. When a company announces a stock split, the current stockholders will be given with lower share price. However, the market value of the company doesn’t change so as the value of the shares held by the shareholders at present. This is the best way to attract more investors, which eventually can lead to unexpected potential income. The more the shares, the more the future value.
The objective of the stock split
Quadrupling your shares depends on how wisely you divided among the investors as every company needs a ceaseless cash flow to attain a fixed goal or target growth. Stock Split is used to maximize the outcome opportunity by sharing your money among different asset classes such as real estate, bonds, stock, commodity, equity, etc.
Because of this stock splitting, your money or value reacts differently to various economical environments. This also allows you to expect a different profit range from the economic value of the diversified assets with which you split the shares. Walk through the changing market value with rational thinking for sustainable growth.
- Appraise dividend.
- Maximize shareholder wealth.
- Make shares affordable to the new investors.