What is a stock split?
Key Points
Stock split refers to a listed company splitting one share into multiple shares.
Stock splits often occur when the stock price is too high, and if the stock price is too low, the listed company may consolidate multiple shares into one.
Stock splits do not change the value, proportion, or total market value of each shareholder's stocks, but they directly reduce the stock price, which may increase investors' desire to purchase and the liquidity of the stocks.
Stock splits may trigger a rise in the stock price, but it may not, as the impact on the stock price varies for different companies.
Concept Explanation
Everyone knows that paper can be divided, but did you know that stocks can also be divided? Stock split, also known as stock split, refers to a listed company splitting one share into multiple shares.
Stock splits often occur when the stock price is too high. Because this means that the purchasing threshold is not low, it may block many investors outside, and the liquidity of the stocks will also be affected.
The proportion of stock splits is unlimited, ratios such as 1:2, 1:3, 3:4, etc. are all possible. For example, a 1:2 stock split means that one share is split into two shares, and the stock price is halved accordingly.
Assuming you have 100 shares of stock with a price of $20 per share before the stock split, after the split, you will have a total of 200 shares of stock and the price per share will become $10. As can be seen, the total value of the stocks you own remains unchanged.
It is also important to note that even though the number of shares issued has increased, the proportion of shares held by each shareholder remains the same, and the total market value of the company remains unchanged.
Additionally, because many price tables adjust historical prices after a stock split, we usually do not see a price cliff caused by the split. What we see is still a smooth curve, which better reflects historical price changes.
Conversely, if the price is too low, the listed company may choose to consolidate shares, combining several shares into one share, and the stock price will be adjusted proportionally.
Specific Impact
So what exactly is the impact of a stock split? Clearly, it will directly lead to a decrease in the stock price, which may attract more investors and potentially increase the liquidity of the stock. On the other hand, while a stock split may not directly trigger an increase in stock price, it may be seen as reflecting the company's confidence in the future.
Therefore, the stock price may rise due to the impact of the stock split. However, it may not rise, or even if it does, it may soon experience a decline. So, we should approach this rationally.
Detailed case studies.
In July 2020, after announcing its third-quarter financial report, Apple announced a 1:4 stock split. Upon this news, the stock price surged nearly 6%. From the stock split announcement date to the stock split day, in approximately a month's time, the stock price rose by 37%. However, after the stock split, in about two weeks, the stock price dropped by 25%.
In 2020, CSX Corp also underwent a stock split, but its stock price change was quite different. From the stock split announcement date to the stock split day, the stock price slightly decreased. However, after the stock split, the stock price slightly increased.
Another classic case is Berkshire Hathaway, a company that never attracts investors through stock splits. According to Warren Buffett's 'Letter to Shareholders,' Berkshire Hathaway aims to attract investors who are interested in long-term company growth rather than those overly focused on the company's stock price.
