Share Splitting

Share Splitting Stock Split Share Capital Liquidity Equity Management Stock Price Trading
Share splitting involves dividing the share capital of a company into smaller units. This practice usually aims to make shares more affordable and increase their liquidity in the market.
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What is Share Splitting?

Share splitting, also known as a stock split, is a corporate action in which a company divides its existing shares into multiple new shares to boost the stock’s liquidity. Although the number of shares outstanding increases, the total dollar value of the shares remains the same, reflecting the proportionate split in share price. For example, in a 2-for-1 stock split, a shareholder with one share valued at $100 would end up with two shares each worth $50.

Examples of Share Splitting

  1. Example 1: Apple Inc.

    • In August 2020, Apple Inc. performed a 4-for-1 stock split. Prior to the split, Apple’s share price was around $500. Post-split, each share was valued at approximately $125, making it more affordable for small investors to purchase the stock.

  2. Example 2: Tesla Inc.

    • Tesla Inc. carried out a 5-for-1 stock split in August 2020. This action reduced its share price from around $2,000 to approximately $400 per share, making the stock more accessible for a broader range of investors.

Frequently Asked Questions (FAQs)

What is the purpose of a share split?

The primary purpose of a share split is to make shares more affordable and hence more attractive to small investors. By reducing the share price, companies can increase the marketability and liquidity of their stocks.

Does a share split affect the value of a shareholder’s investment?

No, a share split does not affect the overall value of a shareholder’s investment. Although the number of shares held increases, the market price per share decreases proportionally, keeping the total value unchanged.

Are there any financial benefits to conducting a share split?

While a share split does not change the value of shares, it can lead to increased trading volume and enhanced liquidity. This can positively influence the market perception of the stock and potentially increase its demand and price over time.

What is the difference between a share split and a scrip issue?

Both share splits and scrip issues increase the number of shares in circulation, but the mechanics differ. In a share split, the face value of shares is divided into smaller units. In a scrip issue, or bonus issue, additional shares are issued to existing shareholders, usually without altering the original share price.

What happens after a reverse share split?

A reverse share split consolidates the number of shares in circulation, often to boost the stock price if it has fallen substantially. For example, in a 1-for-5 reverse split, five existing shares are consolidated into one new share.

  • Stock Split: Another term for share splitting, where a company’s existing shares are divided into multiple shares to reduce the trading price proportionally.
  • Reverse Stock Split: The opposite of a stock split, reducing the number of shares in circulation to increase the trading price proportionally.
  • Scrip Issue: Similar in effect to a share split, where additional shares are issued to existing shareholders for free, often used as a way to distribute retained earnings.
  • Liquidity: A measure of how easily an asset can be bought or sold in the market without affecting its price.
  • Dividends: Payments made by a corporation to its shareholders, usually as a distribution of profits.

Online References

  1. Investopedia - Stock Split
  2. Yahoo Finance - Understanding Stock Splits
  3. SEC - Stock Splits and Reverse Stock Splits

Suggested Books for Further Reading

  1. “The Intelligent Investor” by Benjamin Graham

    • A comprehensive guide to financial literacy and investment.

  2. “One Up on Wall Street” by Peter Lynch

    • Insight into how to utilize stock market trends effectively.

  3. “Common Stocks and Uncommon Profits” by Philip Fisher

    • A classic on growth investing and how to analyze prospective investments.

Accounting Basics: “Share Splitting” Fundamentals Quiz

### What happens to the total market value of a company's shares after a share split? - [ ] It increases. - [ ] It decreases. - [x] It remains the same. - [ ] It can vary. > **Explanation:** The total market value of the company's shares remains the same after a share split because the number of shares increases, but the price per share decreases proportionately. ### Which action splits one existing share into multiple new shares? - [x] Share splitting - [ ] Reverse share splitting - [ ] Dividend issue - [ ] Share repurchase > **Explanation:** Share splitting divides one existing share into multiple new shares to reduce the stock price and make it more affordable for investors. ### What was the share price of Apple Inc., post the 2020 4-for-1 stock split? - [ ] $500 - [ ] $250 - [x] $125 - [ ] $75 > **Explanation:** After the 4-for-1 stock split by Apple Inc. in August 2020, the share price was approximately $125, down from $500. ### Which shareholder demographic benefits most from a share split? - [ ] Large institutional investors - [x] Small individual investors - [ ] Bondholders - [ ] Debt investors > **Explanation:** Small individual investors benefit most from a share split as the reduction in share price makes buying shares more affordable. ### What is the primary reason companies execute a share split? - [x] To increase trading liquidity - [ ] To raise new capital - [ ] To distribute profits - [ ] To reduce total market value > **Explanation:** Companies execute a share split primarily to increase the trading liquidity of their stocks by making shares more affordable and accessible. ### In the context of stock splits, what is the term for consolidating existing shares to boost the stock price? - [ ] Scrip issue - [ ] Dividend reinvestment - [x] Reverse stock split - [ ] Share repurchase > **Explanation:** A reverse stock split consolidates existing shares to boost the stock's price, which is the opposite of a share split. ### What changes occur during a reverse share split? - The number of shares: - [x] Decreases - [ ] Increases - [ ] Remains the same - The price per share: - [x] Increases - [ ] Decreases - [ ] Remains the same - The value of investment: - [ ] Increases - [ ] Decreases - [x] Remains the same > **Explanation:** In a reverse share split, the number of shares decreases, the price per share increases proportionally, but the overall value of the investment remains the same. ### Which event is technically different but has the same effect as a share split? - [x] Scrip issue - [ ] Stock dilution - [ ] IPO - [ ] Convertible bond issue > **Explanation:** While technically different, a scrip issue has the same effect as a share split by increasing the number of shares in circulation. ### What is the common share split ratio used by Tesla Inc. in 2020? - [ ] 2-for-1 - [ ] 4-for-1 - [ ] 3-for-1 - [x] 5-for-1 > **Explanation:** Tesla Inc. executed a 5-for-1 stock split in 2020. ### Who gets affected by changes induced by share splits? - [x] Existing shareholders - [ ] Bondholders - [ ] Future shareholders only - [ ] Company directors > **Explanation:** Existing shareholders are directly affected by the changes induced by share splits, as their number of shares increases while the price per share adjusts downwards.

Thank you for exploring the fundamentals of share splitting with us. Keep expanding your financial knowledge for better investment decisions!

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