Stock splits and reverse stock splits (or share consolidations) are ways companies change the number of shares they have without changing the overall value. Think of it like cutting a pizza into more or fewer slices. Check how these two methods work 👇
Stock split
This is when a company increases its number of shares and decreases the shares' price. The market value of the business stays the same.Â
Companies often perform stock splits to make shares more affordable to their investors. The stock split does not dilute the ownership, unlike issuing new shares.Â
đź’ˇExample
You own 100 shares of company A, trading at $100 per share, making the value of your position $10,000 (100 x $100). The company declares a 2-for-1 stock split.
As a result, you will now own 200 shares at a price of $50 per share. The value of your position remains the same after the split - 200 shares x $50 = $10,000.
Think of it like slicing a pizza into five or ten slices.🍕 The pizza as a whole remains the same; it's just divided differently.
Reverse stock split
This reduces the number of shares and increases their individual value. Just like the stock split, it does not affect the value of the company.
đź’ˇExample
You own 200 shares of a company valued at $50 per share, making the total of your position $10,000. If the company performs a 1-for-2 reverse stock split, your position will be adjusted to 100 shares at a price of $100 per share. The value remains $10,000.
The pizza example remains valid here as well.
How are fractional shares affected?
It's exactly the same.
- For a stock split, 0.25 shares at $100 would become 0.5 shares at $50.
- For a reverse stock split, 0.5 shares at $50 would become 0.25 at $100.
How are dividends affected?
Stock splits do not change the total amount of dividends paid by a company. They would be distributed according to your holdings on the ex-dividend date.
If a stock split occurs before the ex-dividend date, the dividend value will be adjusted proportionally to the split.
đź’ˇ Example
A company pays $1 million in dividends per year and has 10 million shares outstanding. The dividend per share would be $0.10. In the case of a 2-for-1 stock split, the number of shares outstanding would double to 20 million, but the amount paid in dividends will remain the same ($1 million). The dividend per share will become $0.05.
đź“„ Note
All pending orders will be cancelled automatically in the event of a stock split or a reverse stock split.