Stock Splits and Reverse Stock Splits

The definition of a stock split is “An increase in the number of shares of a corporation without changing the shareholder’s equity.

A stock split is a corporate action that makes one share of stock become more than one share of stock. The price of the stock, however, will not increase because the price will be divided by the increase in shares. The most common stock split ratios are two for one, three for two, and three for one. For example, if the split ratio is 1:2 for a stock with a price of $20.00 per share, then each share will be two shares with a price of $10.00. Now there are two shares times ten dollars, which is equal to the value of one share at a price of twenty dollars.

It will be automatically deposited to its brokerage account. The shareholder does not gain or lose after a stock split. The

corporation’s number of shares will increase according to the amount of the stock split and the price of the shares will decrease the same proportion.  

A reverse stock split is the opposite of a stock split. For example, if the reverse split ratio is 1 for 2 for a stock with a price of $30.00 per share, then each two shares will be one share with a price of $60.00. Just like a stock split, a shareholder does not gain or lose after a reverse stock split. The price of the corporation’s shares will increase, but the number of shares will decrease.

A stock split happens when the prices of a corporation’s shares become too high or too much greater than its competitor’s shares. It makes it easier for a small investor to buy shares in the corporation by decreasing the price. The liquidity of the shares of the corporation is increased, making a more stable stock market.

A reverse stock split is made by corporations that are in financial trouble. The prices of their shares are usually very low. They make a reverse stock split to gain respectability or to try to avoid being delisted from the stock exchange.

Whether a stock split is advantageous or disadvantageous to investors is controversial. A stock split decreases the price, making it more easily affordable to investors. It also increases liquidity. But the actual value of the stocks of the corporation has not increased.  

In the past few months, Six Flags Entertainment Corporation, 3D Systems Corporation, Maximus Incorporated, Reynolds American Incorporated, Magna International Incorporated, and Ametek Incorporated have all made corporate actions for stock splits.