Stock Split Doesn't Change Investment Value? Check out the explanation here

What is Stock Split

A stock split is a doubling or distribution of the number of shares in a company that does not change the overall capitalization. For example, if a company doubles its number of shares by giving investors one additional share for every share they own, then each shareholder will own twice as many shares. However, the overall value of the outstanding shares did not change due to the absence of additional capital paid to the company. When a company is worried about its stock price is expensive and wants to make their stock price affordable, then the action they take is to use a stock split. This can help companies to attract new investors without increasing market capitalization. 

Purpose of Stock Split 

If you're wondering why companies split their shares? So the answer itself depends on what the company uses their company's stock split for. The stock split itself has been explained at the beginning that there is no increase in market value, and most of it is done to make stocks more affordable for investors.

Here are the main reasons why a company does a stock split:

1. Stocks are more accessible: The main purpose of a stock split is to reduce the price of expensive stocks, especially when compared to the price levels of their competitors in the industry. So that by dividing the shares, the shares can be easily accessed by more than one investor.
2. Creating more liquidity: Stock splits themselves can increase the number of shares available, so it results in greater liquidity, which makes stocks easier to trade. Higher liquidity will of course be better for investors because it will make selling and buying stocks at affordable prices. In this case, trading can also be done quickly.
3. Attract investors: When a stock splits, the company is often considered successful. The fact that the high stock price should be able to split its shares and be proof to investors that the company is successful should be a good investment.

Stock splits make the value of stocks more affordable for investors so that they can be used to attract new investors who are reluctant to buy high stocks. The move is a useful strategy when a company's stock price rises to a level that leaves investors out, or when the price rises significantly higher compared to its competitors' shares.

Types of Stock Splits

Generally, the types of stock splits used are traditional stock splits, such as two-for-one, three-for-one, and three-for-two. In the world of a two-for-one stock split, the shareholder receives two shares after the stock is split for each share they own before the split takes place. As for the three-for-one split, the shareholders receive three shares, and in the three-for-two split, the shareholders receive three shares for each two.

Example of Stock Split

Public companies, including blue-chips, can implement this strategy. The company's value increased due to several factors such as acquisitions, new product launches or share buybacks. For some reason, the market value of the quoted stock becomes more expensive for investors to buy, so this is what affects market liquidity because fewer investors can afford to buy stocks. An example of how to calculate a stock split is that Company ABC has announced a two-for-one stock split. Before the split, you had 100 shares priced at $80 each, which adds up to $8,000. Once the split is complete, then your total investment will still remain the same at $8,000 because the stock price has dropped based on the split, so the $80 stock becomes half price or $40 after the two-for-one split. Then you have 200 shares at a price of $40 each, so the total investment is still at the same value, which is $8,000. 

Reverse Split

A reverse split is a reverse stock split that often occurs in small companies. The company usually believes that the price of the shares they own is too low to attract interest from investors. Companies will perform reverse split actions to maintain their listing on the stock market thus attracting the interest of certain investors who may not buy shares at a price below a certain amount. Reverse splits often involve companies in the OTC market. Reverse stock splits themselves are generally less in demand among other experienced companies. If a reverse split occurs, then the company is encouraged to proceed but must remain cautious. Reverse splits will usually run at low prices where stocks are high risk. 

Conclusion

Stock splits do not affect the overall market capitalization by themselves. However, it is simply changing the number of shares or the structure of shares in the company. If you like a stock, then buy it before or after the stock split is announced. You don't need to buy stocks before the stock split occurs. Although the split does not affect the value of a stock or the stock price adjusted to the split, of course this can be a positive or negative catalyst. A stock split can be a lucrative move for companies looking to attract more investors. This also applies to companies that are growing rapidly. A growing company may choose to split their shares and give investors a positive indication of growth which ultimately helps its growth.