Stock Split Guide: Definition and How To Benefit From This Situation
What Is a Stock Split?
The split occurs when a company’s board of directors decides to increase the number of outstanding shares. They do this by issuing additional shares to current shareholders.
Despite the fact that the number of shares outstanding has increased, the total dollar amount of the shares remains the same. So by simply splitting the stock, the company doesn’t gain any value. For example, say that a company has decided to do a 3-for-1 stock split. Say that you currently hold
100 shares of their stock with a value of $200. When the stock splits, you will have 300 shares, but the total value will still be $200.
Defining Share Splits
When a stock has a forward split, the number of shares added are typically listed by a ratio. So, if the amount of shares were doubled, it would be a 2-for-1 split. Other common ratios are 3-for-1 and 5-for-1.
Why Do Stocks Split?
The intention of a stock split is to make the shares more accessible to smaller investors without sacrificing or changing the underlying value of the company. For an investor trading from a small account, it’s much easier to invest in shares if they are priced at $10 each versus $200, for example.
Is a Stock Split Good?
A stock split in and of itself is actually a neutral thing. It’s a simple method of dividing the shares. However, it can be an indicator of good things to come for both the company and its investors.
The idea is that if a company’s stock price is elevated to the point where a split is required, it’s a good indication that they have potential to rise even further and that it’s a good idea to buy.
Advantages of Stock Splits
More liquidity. When a stock splits, it provides more liquidity to a stock. Of course, for traders, liquidity can be a double-edged sword.
More affordable shares. When a stock splits, the per-share stock price is lowered. This makes the stock more affordable, which can make it appealing and available to many more buyers.
For example, if a stock is trading at $600 per share, it will shut out a lot of buyers. If you had $6,000, you would only be able to buy 10 shares! That doesn’t offer you much flexibility or much of a chance to diversify.
Recent Stock Split Examples
AFLAC
Insurance company AFLAC, with its infamous duck mascot, has been quacking all the way to the bank.
The company, which provides insurance to workers in the United States and Japan, has created a successful business model.
Their success has shown in their share price, which has risen substantially in recent years. In March of this year, AFLAC announced a 2-for-1 stock split, citing the goal of improving the stock’s liquidity. This was AFLAC’s ninth stock split, and was delivered as a 100 percent stock dividend.
Samsung
Intel who? Not long ago, Samsung exceeded Intel as the world’s biggest supplier of semiconductors, with over $69 billion in revenue in 2017.
Soon after this announcement, Samsung wisely announced a whopping 50-to-1 stock split. According to Forbes, this increased the number of shares from about 128,386,494 to 6,419,324,700 shares. Before the stock split, Samsung’s stock was over $2,300 per share. Prior to the split, only a very small percentage of shareholders were individuals.
What is a Reverse Stock Split?
The reverse split will have the opposite effect of the forward split, and will increase the share price while simultaneously reducing the amount of shares.
Defining Share Splits
Usually, reverse splits have higher ratios than forward splits. They’re listed as ratios that reveal how many shares have been reduced, like 1-for-10, 1-for-50, and so on.
Why Would a Company Reverse Split its Shares?
Reverse splits are usually bad news. Frequently, they’re done by companies that are doing very poorly and in danger of being delisted.
One of the most common reasons for a company to be delisted? They don’t meet the minimum price requirements. So by performing a reverse split, they’re trying to remain above the minimum price needed to remain listed.
My Stock-Split Tips for Traders
How Do Stock Splits Affect Short Sellers?
With short selling, you’re basically betting against the stock, hoping to take profits when it declines in value. It’s not always simple, though: You have to borrow shares through your brokerage account, which means you have to find shares to borrow.
As you know from my “No Borrow, No Cry” video, they aren’t always available. You then sell the stock on the secondary market, in hopes that you’ll be able to purchase the same amount of shares at a lower price before you have to pay up on your loan.
Bottom line: A stock split won’t offer an active advantage to a short selling position.
How to Benefit from Stock Splits
Like any other facet or sector of trading, stock splits can be beneficial to traders. But it takes time and plenty of hard work and study to learn how to understand and identify how stock splits could contribute to your bottom line.
Both stock splits and reverse splits are not in and of themselves profitable, but they can both act as indicators. This means that as a trader, you can consider a stock split and its effects in your stock research.
Forward stock splits can offer a powerful indicator that a stock is following an upward trend, and that you can take advantage of it.
Reverse splits may have a negative connotation, but they can also provide an opportunity. If, by raising the share price, a stock can now be listed on a bigger exchange, it may capture the eyes and interest of more shareholders. This can increase its value.