Stock Split

Definition

A stock split is a process by which a company increases the number of its outstanding shares and correspondingly reduces the price per share to enhance the stock's liquidity and attractiveness. A stock split does not change the company's total market capitalization or the total value of shareholders' holdings; it merely reduces the face value per share while increasing the number of shares held by shareholders. For example, in a 2:1 stock split, each share held by a shareholder is split into two shares, and the price per share is halved. Stock splits are typically conducted when a company's stock price is high, making it easier for investors to buy and trade.

Origin

The concept of stock splits originated with the development of the stock market, particularly in the early 20th century, when companies began to realize that lowering stock prices could attract more investors. One of the earliest stock splits occurred in 1927 when Standard Oil of the United States conducted a stock split to increase its stock's liquidity.

Categories and Features

Stock splits are mainly divided into forward splits and reverse splits. A forward split increases the number of shares and reduces the price per share, while a reverse split decreases the number of shares and increases the price per share. Forward splits are typically used to lower the trading threshold of high-priced stocks, while reverse splits are used to improve the market image of low-priced stocks. The advantage of forward splits is to enhance stock liquidity and market appeal, while reverse splits help avoid stocks being perceived as penny stocks.

Case Studies

A typical case is Apple's 7:1 stock split in 2014. Apple's stock price was close to $700 before the split, and the split reduced the price to about $100 per share, making it more accessible to investors. Another example is Tesla's 5:1 stock split in 2020, which reduced its stock price from about $2200 to about $440, significantly increasing its market liquidity.

Common Issues

Investors often misunderstand that a stock split affects the fundamental value of a company. In reality, a stock split does not change the company's total market capitalization or the total value of shareholders' holdings. Another common issue is the concern that stock prices will fall after a split, but typically, due to increased liquidity, stock prices may perform positively post-split.