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\u00a0<\/span><\/p>\n Stock split is also known as a scrip issue, bonus issue, capitalization issue or free issue.<\/span><\/p>\n When a company divides the existing shares (stocks) into multiple new shares, it is known as stock split.<\/span><\/p>\n It is done to boost the stock’s\u00a0liquidity. <\/span><\/p>\n Here, stock liquidity means conversion of shares into ready cash without affecting its market price.<\/span><\/p>\n Stock split increases number of outstanding shares by a specific multiple but the total capital value of the shares remains the same.<\/span><\/p>\n \u00a0<\/p>\n <\/p>\n <\/p>\n Some split ratios are 2-for-1 or 3-for-1, 5-for-1, 10-for-1, 100-for-1 etc.\u00a0<\/span><\/p>\n The most common split ratios are 2-for-1 or 3-for-1; sometimes it is denoted as 2:1 or 3:1.<\/span><\/p>\n 2-for-1 means the stockholder will have two shares will receive one share at present.<\/span><\/p>\n 3-for-1 means the stockholder will have three shares will receive one share at present.<\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n Stock splits are events that increase the number of shares outstanding and reduce the par or face value per share. <\/span><\/p>\n Existing shareholders would see their shareholdings double in quantity, but there would be no changes in the proportional ownership. <\/span><\/p>\n For example, a shareholder having 1,000 shares out of 100,000 would then own 2,000 shares out of 200,000. <\/span><\/p>\n \u00a0<\/span><\/p>\n Reverse stock splits are effectively the opposite transaction, where a company divides, instead of multiplies, the number of shares that stockholders own, raising the market price accordingly.<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Accounting treatment <\/span><\/b><\/p>\n When a company splits its shares, it recalls all the shares outstanding.<\/span><\/p>\n Then the company issues more new shares to replace them. <\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n Many companies try this idea to keep their stock price unchanged. <\/span><\/p>\n Splitting shares need a significant expense.<\/span><\/p>\n Shareholders might question why the company is spending money that way. <\/span><\/p>\n Splitting of the stock increases liquidity. <\/span><\/p>\n \u00a0<\/span><\/p>\n The company can use bid-ask spread on a percentage basis to reduce expenses.<\/span><\/p>\n A stock’s price is also affected by a stock split. <\/span><\/p>\n After a split, the stock price will be reduced since the number of shares outstanding has increased. <\/span><\/p>\n In the example of a 2-for-1 split, the share price will be halved. <\/span><\/p>\n Thus, the number of outstanding shares and the stock price change, the market capitalization remains constant. <\/span><\/p>\n \u00a0<\/span><\/p>\n A stock split is usually done by companies when their share price increase either a certain levels or too high <\/span><\/p>\n The primary motive is to make shares seem more affordable to small investors even though the underlying value of the company has not changed. <\/span><\/p>\n The price of a split stock can also increase immediately after the split. <\/span><\/p>\n Since many small investors think the stocks is now more affordable and they buy the stock.<\/span><\/p>\n These investors boost demand and increase the prices of the stock. <\/span><\/p>\n \u00a0<\/span><\/p>\n Another reason for the price increase is that a stock split provides a signal to the market. <\/span><\/p>\n The company’s share price has been increasing and people assume this growth will continue in the future, and again, boost demand and prices. <\/span><\/p>\n \u00a0<\/span><\/p>\n Another version of a stock split is the reverse split. <\/span><\/p>\n This procedure is typically used by companies with low share prices.<\/span><\/p>\n Many stock exchanges will delist stocks if they fall below a certain price per share. <\/span><\/p>\n Stock split increases prices in the market and it helps to prevent the company from being delisted.<\/span><\/p>\n \u00a0<\/span><\/p>\n Thus, a stock split help to small investors and provides greater marketability and liquidity in the market. <\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\nStock Split <\/span><\/b><\/span><\/h2>\n
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<\/p>\nWhy Stock Splits? <\/span><\/b><\/h3>\n
Stock Dividends vs Stock Splits<\/span><\/b><\/h3>\n
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