Need-to-knows about Stock Splits

What is a stock split?

Stock split is a corporate action in which a company increases shares to existing shareholders without changing their equity. In other words, shares held by existing shareholders increase, but the total value of their shares remain unchanged. A company can split their stocks by any ratio, for example, 2-for-1, 10-for-1, or 20-for-1.

Let’s look at an example. Investor A holds 10 shares of XYZ stock trading at $100 per share and a 10-for-1 stock split is announced. After the split, he holds 100 shares of XYZ stock at $10 per share. The total value of the shares remains at $1,000 both before and after the stock split.

Why do companies split shares?

• The first reason that companies split shares is to attract more investors. With a lower price, people can buy more shares with the same investment amount. This could stimulate willingness to buy the stock.
• The second reason is liquidity. There will be more shares in the market after stock split. More shares mean greater liquidity.

What is a reverse stock split?

A stock split is also called a forward stock split. A reverse stock split is just the opposite. It decreases outstanding shares without changing the equity. In other words, shares held by existing shareholders decrease, but the total value of their shares remain unchanged. Reverse stock split can be 1-for-2, 1-for-5, etc.

Let’s look at an example. Investor B holds 200 shares of XYZ stock trading at $5 per share and a 1-for-2 stock split is announced. After the split, he holds 100 shares of XYZ stock at $10 per share. The total value of the shares remains at $1,000 both before and after the stock split.

A company may declare a reverse stock split to meet the minimum listing requirements.

How does a stock split affect dividends?

The dividend is only affected by a stock split if it occurs before the record date. In that case, the total dollar value of the dividend will remain the same. The dividends paid per share will be adjusted according to the split ratio.

For example, XYZ company has declared a dividend of $2 per share and a 2-for-1 stock split before the dividend record date. After the stock split, existing shares double and investors who own shares before the record date will receive a dividend of $1 per share.

How to find companies with stock split schedules?

1. Go to the Market page on the Webull app.
2. Tap Explore.
3. Tap Splits in the Calendar section.

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