What is split (splitting up) Shares

What is split (splitting up) Shares

Split Shares - a method of attracting additional investors by deliberately lowering the market price of a share and proportionally increasing the number of shares in circulation.

Split Shares or splitting of shares used by joint-stock companies to, to make the stock more attractive to private investors. But companies don't do this with advertising., and by artificially lowering the market price.

What is a stock split?

Split - increasing the number of shares by dividing them in a certain proportion. As a result of the split, the number of shares grows, сто­и­мость сни­жа­ет­ся, and the company's capitalization remains the same (remember the example with bills). На­при­мер, in the case of a 2-to-1 split, the investor's number of shares doubles, and the cost is halved: two new shares are priced equal to one before the split.

Пред­по­ло­жим, some company has issued 10 million shares. They are currently quoted at $40 for pike. Thus, total capitalization is 400 million dollars ($40*10 million shares = 400 million).

The company decides to crush 2-to-1. For each available share, the investor receives one more directly to the brokerage account. Now he has twice as many papers, however, their value fell by 50% — with $40 to $20. За­меть­те, ка­пи­та­ли­за­ция оста­лась преж­ней ($20*20 million = 400 million). The real value of the company has not changed at all.

The most common splits are 2-to-1, 3-k-2, 3-k-1. The easiest way to calculate the cost of new shares is, dividing the current price by the crushing coefficient. In our example $40 should be divided into 2, and we will get the cost after the split - $20. If stocks were divided 3-to-2, then their final price would be $40/(3/2) = 40/1,5 = $26,6.

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Ино­гда ком­па­нии про­во­дят об­рат­ные спли­ты. In this case, the number of shares outstanding is reduced., and the total cost is growing. На­при­мер, if the company decides to do a 1-to-10 reverse split, then for everyone 10 shares in the portfolio, the investor will receive one new. Таб­ли­ца по­мо­га­ет по­нять, what happens to the price, the number of shares and capitalization of the company during various splits.

Capitalization does not change

To understand stock splits, you need to understand the displacement law of arithmetic.: the sum does not change from the change of the places of the terms. The amount in this case is the market capitalization of the company (ie. total value of all shares). In other words, no matter, how the number of shares and the price change, when split, the market capitalization remains unchanged.

Stock split example

Split is best demonstrated with an example.. Let's admit, in circulation on the market 1 mln shares of AAA company, the cost of which before the split is 1000 UAH. To make the stock cheaper, our fictional company AAA decides to split or split its shares in relation to n to 1. (The concept of a ratio or ratio is integral to the split itself.. Splits are often done 5 to 1, 2 to 1 etc.) In this way, split affected the market as follows:

  • the number of issued shares increases n times
  • the market price of a share is divided by n

In this way, if there was a split 5 to 1, then all shareholders would see in their terminals, what do they own in 5 times more shares. But at the same time, the market price of each share would be reduced by 5 once, and would be 200 UAH. Capital unchanged after crushing, because. 10 shares on 1000 UAH. equally 50 shares on 200 UAH.

Why is stock split necessary

Usually, the need to split shares arises when the share price is very high, or significantly exceeds the stock prices of competitors in the industry. Obviously, that most private investors share in 1000 UAH. will not be very attractive. And if many investors refrain from investing their funds in the company, that is, naturally, negatively affects both the market value and the liquidity of the share.

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In other words, cutting off the layer of private investors, the company deprives itself of access to large capital. But in order to regain liquidity and demand from an additional niche (ie. private investors), companies resort to share split.

Пер­вая при­чи­на — пси­хо­ло­ги­че­ская. As prices rise, investors begin to view stocks as too expensive to buy.. Crushing reduces their cost to a more attractive level. The real value of the stock does not change at all, but their lower face value can affect investor perception and attract new buyers. For existing shareholders, the increase in the number of shares in the portfolio becomes just a pleasant bonus..
Вто­рая при­чи­на – splitting of shares increases their liquidity due to an increase in the number of securities in circulation. For some expensive stocks, the difference between the bid and ask price sometimes reaches a significant value..

The stock rises after the split

When the price of a share goes down, investors, previously unavailable, start buying it, thereby increasing demand. Increased demand will pull the stock price up. In this way, after split, share price rises In most cases.

Impact of splitting on the price chart

Obviously, what, if a potential investor, studying the stock on the chart, will see a sharp drop from 1000 to 200 hrn., he will be quite skeptical about this action, and is unlikely to consider it as a potential investment. Little of, those shareholders, who did not know about the split in time, be upset (to put it mildly) and will arrange bedlam in the market, if they find out, that the stock collapsed overnight in 5 once.

Well, really, is it fair to reflect on the chart such a monstrous drop, which, in fact, not real? After all— we must remember — market capitalization from splitting does not change.

To solve such a delicate issue, they came up with the so-called. "Adjusted closing price". This concept applies to technology, which output schedule on-screen promotions. With this mode, the program outputs the adapted data before the split, ie. she divides all closing prices before the split by the split factor. Ie. if yesterday the price was 1000, and today there was a double split, then, looking at the chart with adapted prices, and today's and yesterday's prices on today's chart will be 500. (In Ukraine, this technology is not used, Unfortunately; at least, i don't know any web service, which would apply such a calculation.)

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Split or splitting of shares - Phenomenon, attractive for a private investor. A split of shares changes the market value and the number of shares in in inverse proportion, corresponding to the split ratio, thus without affecting capital. When you see a sharp drop on a stock chart, remember, what could it be split: pick up the stock history and check.

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