# Stock Split - Explained

What is a Stock Split?

# What is a Stock Split?

A stock split is a transaction by a company dividing its current shares into two - resulting in twice as many outstanding shares. The company takes this step in order to increase its business by increasing the value of shares. There is a special multiple which helps increase the number of shares that the company has authorized, but there is no change in the total value of the shares in terms of dollar if we compare with the amounts that are already split. The reason behind it is that there is no addition to the real value in spite of split. There are some ratios regarding split but 2-for-1 or 3-for-1 are the most ordinary ones. It means if the stockholder holds some shares earlier, he will have two or three shares respectively. In summary:

• A stock split is an effort made collectively by a group of large companies that enables the company to develop the business by dividing its present shares into other many other shares. Using this scenario, the company can enhance its business.
• The number of shares that the company confirms, can be increased by applying a typical multiple-formula, without a change in the total value of the shares while replacing them with dollars. It is so because the split doesn't affect the real value.
• Amongst the ratios of the split 2- for-1 or 3-for-1 are the most usual. It is obvious that if there are some shares in a stockholders possession, he will get two or three shares respectively.
• Reverse stock-split is another type of split, but the opposite transaction. Its based on division, instead of multiplication of the number of shares with the stock-holder and helps the market-prices soar accordingly.

# How a Stock Split Works

A stock split is a combined effort, according to which, a company adopts the strategy of dividing current shares into many other shares. Fundamentally, firms are compelled to split shares in order to decrease the cost of trading their stock to a level which most of the investors find to be convenient. It also raises liquidity of shares. Mostly, the investors believe that it would be better to purchase 100 shares of \$10 stock instead of 10 shares of \$100 stock. So seeing the increase to a great extent, it will be natural for companies to announce that there will be stock split later so as to decrease the price to a more trending price at which stock is traded. No doubt, a stock split results in adding the number of remaining shares, but there is no change in the value of shares when taken in dollars. Its only because the split doesn't make any addition to the real value. Application of the stock split, as well as the cost of shares, goes side by side. The Board of Directors decides to split the stock using a number of methods. For instance, there may be a stock split like 2- for-1, 3-for-1, 4-for-1, 5-for-1, 10-for-1, 100-for-1, etc. The meaning of 3-for-1 stock split is that the number of shares that the investor has, will triple for each share that the depositor holds. Opposite to it, after the 3-for-1 stock split, the price per share will be decreased by dividing the prices by 3. One has to multiply the total number of shares outstanding by the price of one share to calculate the market capitalization. Take it as an example that abc/someone 20 million shares outstanding and the value of one share is \$100. We will multiply the number of shares (20) by the market value (\$100). The answer will be 20 shares x \$100 = \$2 billion which will be the market capitalization. Now suppose, the Board of Directors enforces 2-for-1 formula to split the stock. As an outcome of this split, the number of shares outstanding will double and become 20million x 2 = 40million. But at the same time the price of share would reduce to half i.e. \$100 divided by 2= \$50. In this way the market capitalization will remain unaffected. It will be 40 million shares x \$50= \$2billion again. In the UK, a stock split is termed as bonus issue, scrip issue, capital issue, or free issue.