When a company’s share price shoots up, it decides to lower each share’s price by splitting it in a determined ratio to attract new investors. The company issues more shares of a stock without disrupting its current market value. Hence, the number of outstanding shares increases, but the organisation’s overall market capitalisation stays the same, and so does each existing shareholder’s stake value. This practice is known as a stock split. Suppose you bought one share of company X. Now, it decides to go for a 2-for-1 stock split. You will now own two shares of the company instead of one, but each share's value will be half the value of the original single share.
Hence, the overall worth of your shares remains the same as before. A stock split is quite popular among global companies like Tesla, Amazon, GameStop, Alphabet, etc. In fact, Amazon and Alphabet announced 20-for-1 stock splits very recently.
Since the value of both the company and your investment remains unchanged, wondering how a stock split could be helpful for both the parties? Here’s how:
Here’s how stock splits work:
People often mix up stock splits with bonus shares. However, the two aren't the same. Stock splits divide the organisation’s outstanding stocks. For the existing investors of the stock, a stock split does not really matter much. For them, the overall value of their stake remains unchanged. Nevertheless, giving out bonus shares impacts only the issued share capitals.
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