Stock splits are a fascinating corporate move where a company divides its existing shares into more, increasing the total number of available shares while keeping its overall value unchanged. In essence, the price of each share is adjusted downward to match this increase. Companies typically use stock splits to make their shares more affordable and attractive to a wider pool of investors.
The Purpose of Stock Splits
Think of stock splits like breaking a large chocolate bar into smaller pieces. Even though you now have more pieces, the amount of chocolate remains the same. In the same way, stock splits increase the number of shares, making each share cheaper without changing the total value. This strategy allows more people to get a “piece” of the company.
The main aim of a stock split is to lower the price per share, making it easier for more investors to buy into the company without affecting the overall value of their holdings.
Types of Stock Splits
- Forward Stock Split
This occurs when a company issues additional shares to its current shareholders, effectively increasing the number of shares. This lowers the price per share while keeping the total value of your investment intact.
Example: If you own 10 shares at ₦200 each and the company announces a 5-for-1 forward stock split, you’ll now have 50 shares priced at ₦40 each. Despite the change in the number of shares, your total investment will still be worth ₦2,000.
- Reverse Stock Split
A reverse stock split does the opposite: the company reduces the number of its outstanding shares, which raises the price per share. However, the overall value of your investment remains the same.
Example: If a company declares a 1-for-10 reverse stock split and you have 100 shares priced at ₦5 each, you’ll end up with 10 shares priced at ₦50 each after the split.
How They Impact Your Shares
This affects your shares in several ways:
Investment Value: While the number of shares you own increases, the price per share decreases proportionally, keeping your total investment value unchanged.
Market Confidence: Stock splits are often a sign that a company is growing and confident about its future. This confidence can attract new investors, potentially increasing demand and pushing the share price up.
Dividend Adjustment: After a stock split, dividends are adjusted to reflect the increase in the number of shares. So, if you’re receiving dividends, expect an adjustment in the payout per share.
Conclusion: Stock Splits and What They Mean for You
In conclusion, stock splits provide an interesting way for companies to make their shares more affordable without altering the overall investment value. They can help attract more investors, boost market confidence, and adjust dividends. So, the next time you hear about stock splits, you’ll know how they can affect your shares.