If a company wants to issue more shares but all its shares outstanding are owned, it can initiate a stock split. This is a decision taken by the company’s board of directors to increase the number of shares held by investors and in the stock market. For example, if a 2-for-1 stock split occurs, each investor with one share will receive an additional share at no additional cost. You might think what a steal? Well, not really. If a 2-for-1 stock split occurs, the price of the stock is also halved. As a result, there is no change in the market value of the company, there are only additional shares trading in the market.
The primary objective of a stock split is to decrease the price of shares and make shares of the company more attractive to smaller investors. This increases liquidity and makes the company’s share price match other competitors in the industry. The reduced price per share can cause demand for the stock to increase, as this stock now looks relatively cheaper compared to before the stock split.
Reverse Stock Split
A stock split helps a company with a high share price decrease its price to make it look more attractive and a reverse stock split does the opposite. This allows companies with a low share price to increase their price, to avoid being delisted or seen as invaluable on the stock market. For example, in a reverse stock split of 1-for-3, 9 million outstanding shares at $0.50 each would become 3 million shares outstanding at $1.50 each. Similar to a stock split, the market value of companies remains unchanged.