A Stock Split is a corporate action, splitting or increasing the number of shares. Adjust the company's operating structure to create liquidity of stocks in the market. And investors can access it. It more easily trades more stocks. And existing shareholders benefit from receiving additional shares at the original price.
The reason for a Stock Split is when a company's stock price becomes too high, making it difficult for investors to access. When a Stock Split occurs, it lowers the price of each share, making it easier for investors to access and trade more shares.
What is a Reverse Stock Split?
A Reverse Stock Split is the opposite of Stock Split because it may make the stock price more stable. But the number of shares decreases and the stock price increases. This may result in a decrease in trading value and the volatility of stock prices decreased.
However, a Reverse Stock Split may cause the number of shareholders to decrease. After the merger of shares, fractional shares may occur, which causes some shareholders to receive cash instead and no longer hold shares.
Summary definition of Stock Split and Reverse Stock Split.
- A stock split means the number of stocks increases, the stock price decreases, the market capitalization is the same, and there is Increased liquidity.
- A reverse stock split means the number of stocks has decreased, the stock prices have increased, the market capitalization is the same, and there is reduced liquidity.
Glossary of related terms.
- Par Value = The initial cost of the company.
- Market Price = The price of a security in the stock exchange resulting from the latest trade.
- Market Capitalization = The total value of all the shares in the company's securities.
- Ratio = Change ratio of stocks such as, a 1-for-2 stock split (Ratio 1:2) or a 2-for-1 reverse stock split (Ratio 2:1)
ABC Stock initially has one share priced at $20. and an investor owns 50 shares with a market value of $1000. If the company enacts a 1-for-2 stock split, the stock becomes two shares per $20 (or one share per $10) after the split. As a result of the stock split, the investor will own 100 shares, with the market value remaining at $1000.
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