Stock Splits: The Benefits

Stock splits happen when a corporate decides that a stock has become too expensive for investors, maybe overly exceeding the price levels of similar companies in their sector.  Most of the time, the primary reason is to make the shares of the company appear more affordable to prospective investors.

When a stock split takes place, each share is divided, diminishing its price.  That means if an investors has one share of a stock and Cryptocurrencies Ethereum the company decides to do a 2:1 stock split, that investors gets two shares instead.  And if the former price of one share is $10, now each of the two shares costs $5 dollars.

Basically, the stock’s market cap stays the same even if the number of its outstanding shares increases.

Now, what are the benefits of a stock split?

Price of the stock

As indicated above, corporations do stock splits because their stocks seem to be a little too expensive for investors.  Indeed, there are investors who don’t feel too comfortable investing in costly stocks.

In most cases, investors don’t feel good investing in stocks that are priced higher than $100.  These investors would rather investing in a couple of $50 stocks than one $100 stock.  However, it’s worth noting that there’s really no economic difference between the two.

Companies know this tendency of investors for lower prices. Moreover, a stock split can also be good for the stock’s liquidity, or the capability of the stock to be sold and bought without much affecting its price.

Signal

For economists, stock splits are generally neutral scenarios with regards to the company’s status.  But for many other financial advisers, stock splits are a bullish signals for investors, encouraging them to buy stocks that are set to split.

There are indeed a certain amount of evidence suggesting that Cryptocurrencies Litecoin prices temporarily increase in value immediately after the stock split.  On the other hand, the same sources of proofs also point out that the bullish effect of such splits usually fades very quickly.

Even so, corporations may still use stock splits to signal that the business is in good shape. Just like the first benefit, this one is more psychological than financial.

Value over time

Most of the time, investors who own shares that have a long history of recurrent stock splits can be considered very profitable investors, given the fact that stock splits are usually done when the stock has already grown in value.  Imagine that happening many times in the course of several years.

No Reverse Stock Split

Reverse stock splits, as the name suggests, is the opposite of a stock split.  And even if a stock split is generally considered neutral, a reverse stock split is more often considered a negative sign for the company.

In a reverse stock split, many old shares of a company combine and turn to fewer new shares.  It gives us the idea that the stock’s price has falled extremely low that it has to do a reverse split to prop up its price.

 Such event also calls attention to the stock’s price, making some wonder why its price is very low.