Stock splits and reverse stock splits are corporate actions by which a company aims to respectively decrease or increase its share price without changing its market capitalisation and underlying value.
What is a Stock Split?
A stock split occurs when a company increases the number of shares in circulation while maintaining the same underlying market value of the business. 📈
Companies often perform stock splits to make their shares more affordable to investors. It's important to note that a stock split does not dilute the ownership of existing shareholders, unlike issuing new shares.
How stock splits affect position(s):
Let's say you own 100 shares of company A, which are trading at $100 per share, and 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 overall value of your shares with the company remains the same: 100 shares x $100 = $10,000 before the stock split, and after the split, it will be 200 shares x $50 = $10,000.
It's important to understand that the value remains unchanged, it's similar to slicing a pizza 🍕 into either 5 or 10 slices. The pizza as a whole remains the same, it's just divided differently.
What is a Reverse Stock Split (also known as Share consolidation)?
A reverse stock split is the opposite of a stock split, as it reduces the number of shares and increases their individual value. Importantly, a reverse stock split does not have any impact on the overall value of the company.
How reverse stock splits affect position(s):
Suppose you initially have 200 shares of a company valued at $50 per share. 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. To illustrate this concept, consider the pizza analogy once again. A reverse stock split is like slicing a pizza into 5 slices instead of 10 slices, maintaining the same total pizza but altering the portion size per slice.
What happens if I own fractional shares and there is a stock split or a reverse stock split? 🧐
Fractional shares undergo the same splitting process as whole shares.
In the case of a stock split, let's consider that you own 0.25 shares of company A, priced at $100. If company A performs a 2-for-1 stock split, your ownership will be adjusted to 0.5 shares of the same company, and each share will be valued at $50.
In a reverse stock split, if you currently hold 0.25 shares of company B priced at $50 and the company undergoes a 1-for-2 reverse stock split, your ownership will be adjusted to 0.125 shares of the same company, with each share valued at $100.
It's important to note that all pending orders will be automatically cancelled in the event of a stock split or a reverse stock split.