A company splits their stocks for various reasons and these reasons are supposed to benefit the stockholders, but this is not always what happens. However, the stockholders will be gaining stocks but the value will remain the same. As an example, the stockholder has 50 shares of the stock that splits, they will then have 100 shares but the price for each will be half the price as before.
How do stocks split?
The shareholders call a meeting and vote to divide their stocks. Probably the stocks are not selling as well as they believe they should because of their high price; by splitting them they divide this price in half and make more buyers available, or so the thinking goes.
Or possibly, they’ve bought into the idea that an upcoming stock split will bring a healthier look to their stock offerings, although, according to an Essortment writer What happens when a company splits stock is that “Many investors are under the illusion that if a company splits a stock that it’s a definite upswing in the company’s fortunes.” This may not actually be so and weak stock options will probably remain weak even after they split.
Does the accounting change?
No additional bookkeeping is needed when your stock has split since basically the value is the same, as already stated, all is necessary is to make a note somewhere in the records about the “decreased par value and increased number of shares” according to Principles of Accounting. The ratio of the stock division will need be noted, such as is it a 2 to one, 4 to one or whatever. However, the 2 to one is the most often used option when dividing stocks.
And unless something out of the ordinary changes, suddenly your increased shares have become more valuable because your stock brand, a particular pharmaceutical perhaps as an illustration, has suddenly been found to cure a certain type of cancer, your basic arithmetic will remain the same.
Reasons against stock splitting don’t add up so if a company votes on making the price lower to entice more buyers, then it is probably a good thing. But then, the reasons for splitting stock into a bigger bundle might not be the best thing either. If a stock is doing well as is, and is not too high priced and is bringing in good dividends to its shareholders, then they should be content with things as they are. However, a reverse stock split is has many reasons against it.
Reverse stock split
A reverse stock split is the opposite and it generally lowers the value of the stock, or at least puts the value of the stock lower in the eyes of the general buying public. Exactly what happens when a stock is reverse split?
Most likely it is done as salvaging method. The stocks have dropped too low to remain viable and making three shares, two shares, or even four shares equal the former one share is seen as what it most likely is, a way to keep a devalued stock hanging in there. And even here, the value to the shareholders is the same even though they now own only 25 shares where, in a three to one reverse split, they once owned 75.
If you’ve got your hands on good stocks and you are not sure if you should vote for a stock split, and you have only a minority voice in the company, don’t lose any sleep over the possible consequences; go along with the general feeling that more people will be able to afford the stock after it splits and rest assured there will be a little difference. Don’t expect to suddenly double your dividends, but be delighted if that is what happens.