According to Investopedia: “A stock split is when a company divides the existing shares of its stock into multiple new shares to boost the stock’s liquidity. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because the split does not add any real value.”
Companies are taking this strategic step for several reasons. But mostly, this happens during the growth of the stock, and through Split, they increase liquidity in the entire stock market. For example, imagine that share A costs $ 100 with a market capitalization of $ 100 million. Subsequently, the company decides to do a split (4: 1), and below, we can summarise the impacts:
⦁ the stock price will change from $ 100 to $ 25,
⦁ market capitalization remains unchanged ($ 100 million),
⦁ the number of outstanding shares will increase 4 times,
⦁ if you owned e.g., 100 shares of $ 100 each, so now you will own 400 shares of $ 25 each ->, your investment has not changed,
⦁ the value of the share has not changed in any way.
We presented the individual influences above. However, the primary motive for this procedure may be that the stock is traded in three-digit or four-digit numbers (i.e., in hundreds or thousands of dollars). By announcing any split (often 2: 1, 3: 1, 4: 1), the company will cause the share price to fall at the moment of the split according to the new amount, but the market capitalization was not affected in any way as in other management activities. So the value of your investment has not changed either.
The new price is more attractive for small investors because they can afford more shares, e.g. when it was in the thousands of dollars, they couldn’t afford it. From this point of view, liquidity will increase as more people trade this stock, and the bid-ask spread will also decrease, which in some steps may mean savings. Although the split will not affect market capitalization, announcing of a split of shares in the company can be considered a positive step, and in the short term, it is bullish.
There is also the opposite process in the market. “Opposite” of the split is not entirely typical but may occur. The whole process works the other way around, but the company’s market capitalization does not change in any way. Instead of a reduced price and a larger number of shares, the number of shares will be reduced and their price will increase. Companies can use this strategy if the share price falls for a long time, and some stock exchanges may have a problem. Such a company can face the risk of delisting due to the meager share price, and companies can decide on this step to eliminate this risk.


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