stock split strategies

A stock split is a decision by the company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders.

The term "split" refers to the increase in the number of shares an investor owns.

For example, in a 2-for-1 split each shareholder gets an additional share for each share owned.

As the outstanding value of the company is now divided by more shares, the quoted value of the shares also reflects this change.

Most strategies surrounding stock splits usually refer to the common perception that stock splits may result in upward share price pressure.

There are several quoted reasons for this perception.

For one, the stock has usually risen for a long time before the split.

Thus, the price per share needs to be cut to make it available to smaller investors and increase market liquidity.

Increased liquidity for smaller investors, a long-term share price increase trend, and the signaling effect of the stock split (investors may read that the company believes the growth will continue in the future as well, thus the need for a split) may all contribute to upward price pressure.

That thinking does not apply to reverse stock splits, where the number of shares decreases.

The companies motivation for such splits are also different, including increasing the price per share in order not to be de-listed from the stock exchange (such minimum price levels exist).

Naturally, that market perception may prove to be wrong on individual companies' stock splits, making this type of strategy risky.

Most investors supplement such basic stock split strategies with valuation-based analysis, and purchase/sell companies making stock splits that are under/over-valued from fundamentals point-of-view.

Stock Split Strategies - Companies

For companies, stock splits increase the number of outstanding shares, increasing liquidity, which benefits investors.

This may lead to increased level of attention the company gets, such as increased analyst following.

When the company is known better to the investment community, it may also mean that the company will have easier time selling additional debt or equity issues to the public.

The lowered information asymmetry (what the company knows about themselves vs. what the investors know) may also result in lowered borrowing rates (for example) for the money the company may raise.


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