Stake Academy – Stock Splits
The stock split. Sometimes they feel like much ado about nothing. Corporate management rebalancing shares and prices with no real impact on company value. But there’s a reason behind each split. This instalment of Stake Academy covers how splits function and why they occur.
Do the splits
Names like Tesla and Apple have all completed a split in the last year. Company management decides to divide the stock price by some factor, which subsequently increases the number of shares available by some factor.
For example, let’s take a hypothetical company called Maverick (MVK).
$MVK has 1 million shares trading at $1000 each. It’s a $1b company. $MVK undergoes a 4-1 stock split. It now has 4 million shares trading at $250. It remains a $1b company.
Why do stock splits happen?
One reason is to increase liquidity. More shares outstanding leads to more shares being traded at each price level. Deep liquidity is a positive for a stock and can attract a more diverse range of investors.
There’s an argument that a lower stock price makes the stock more accessible. While fractional share ownership allows Stake traders to own shares at any nominal price, not all investors have this.
On the other hand, there are reverse stock splits. A company decreases the number of shares outstanding and increases the price of each share.
$MVK has 100 million shares trading at $0.50 each. It’s a $50m company.
It completes a 1-10 reverse split. Suddenly, it has 10 million shares outstanding at $5 each but it’s market cap remains at US$50m.
This typically happens with low value stocks; those under $5. Certain institutions, funds and indexes are not allowed to invest in such names, as defined in their fund mandates Reverse stock splits open certain stocks up to a larger pool of investors.
Moreover, certain indexes or exchanges have have price limits. A reverse split ensures stocks can avoid delisting.
Splits on Stake
Stake is improving its processes to keep you informed about corporate actions like stock splits. In the coming months, we are looking to implement proactive notifications to avoid confusion over changes in balances.
To find out if a company you own has gone through any splits, search the company name followed by “investor relations”. There will be a document outlining all the details.