Stock splits & reverse stock splits are corporate actions with which a company aims to either increase or decrease its existing share price.
1. Stock Split
A stock split is when a company increases the number of shares in circulation without affecting the underlying market value of the business.
Companies often perform a stock split to make their shares more affordable to investors. However, unlike issuing new shares, a stock split does not dilute the ownership of the existing shareholders.
1.1 How will a stock split affect my position(s)?
For example, if you own 100 shares of company A that trades at $100 & the company declares a 2-for-1 stock split, you will now own 200 shares at $50. Nothing changes value-wise - the concept is similar to slicing a pizza in either 5 or 10 slices. There's still only one whole pizza, it's just sliced differently.
2. Reverse Stock Split
A reverse stock split is a corporate action which consolidates (reduces) the number of shares into fewer, proportionally more valuable shares. A reverse stock split is also known as a stock/share consolidation, stock merge or share rollback and is the opposite of stock split, where a share is divided (split) into multiple parts. And just like a stock split, it does not impact the company's value in any way.
2.1 How will a reverse stock split affect my positions(s)?
If you have 200 shares at $50 & a company performs a 1-for-2 reverse stock split, you will now own 100 shares at $100. Using the pizza example again, a reverse stock split would be slicing a pizza in 5 slices instead of 10.
3. What happens if I own fractional shares?
Fractional shares get split just as any other quantity of shares.
- In the example of a stock split, if you own 0.25 shares of company A at $100 & it performs a 2-for-1 stock split, you will now own 0.5 shares of the same company at $50.
- As for a reverse stock split, if you own 0.25 shares of company B at $50 & it performs a 1-for-2 reverse stock split, you will now own 0.125 shares of the same company valued at $100.