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A stock split or stock divide increases the number of shares in a company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur.
A company may split its stock, for example, when the market price per share is so high that it becomes unwieldy when traded.
For example, when the share price is very high it may deter small investors from buying the shares, especially if there is a minimum trading parcel. If the company splits its stock 2-for-1, there are now shares of stock and each shareholder holds twice as many shares. Ratios of 2-for-1 , 3-for-1 , and 3-for-2 splits are the most common, but any ratio is possible. Splits of 4-for-3, 5-for-2, and 5-for-4 are used, though less frequently. Investors will sometimes receive cash payments in lieu of fractional shares.
It is often claimed [ citation needed ] that stock splits, in and of themselves, lead to higher stock prices; research, however, does not bear this out. Momentum investing would suggest that such a trend would continue regardless of the stock split. Some companies have the opposite strategy: Berkshire Hathaway is a notable example of this.
Other effects could be psychological. If many investors believe that a stock split will result in an increased share price and purchase the stock the share price will tend to increase. Others contend that the management of a company, by initiating a stock split, is implicitly signaling its confidence in the future prospects of the company.
In a market where there is a high minimum number of shares, or a penalty for trading in so-called odd lots a non multiple of some arbitrary number of shares , a reduced share price may attract more attention from small investors.
Small investors such as these, however, will have negligible impact on the overall price. The analog in currency would be redenomination. This would be where a currency increases in value so that people have to use small fractions.
Then a new unit such as dollar can be introduced, such that an old unit is equal to 10 or some number new units. An example is with the Australian currency. The Australian pound was split into two Australian dollars. When a stock splits, many charts show it similarly to a dividend payout and therefore do not show a dramatic dip in price.
The company splits its stock 2-for There are now shares of stock and each shareholder holds twice as many shares. To avoid these discontinuities, many charts use what is known as an adjusted share price; that is, they divide all closing prices before the split by the split ratio. From Wikipedia, the free encyclopedia. This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources.
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