What is a stock split or a split
Stock splintering is an increase in the number of assets in circulation by reducing their price. This process is also called split. For example, a ratio of 6: 1 means that the price of one share of an enterprise will decrease six times, and the total number of assets will increase six times. As a result, those who purchased these shares will have more shares, and their number will be a multiple of the split factor. During this procedure, the total value of assets held in the portfolios of shareholders will remain unchanged.
When compared to the economy, a stock split resembles a price denomination. When the cost of goods decreases significantly and zeros on banknotes are removed in the same proportions. As a result, you can buy the same goods and in the same quantity with new banknotes.
What is the need to split shares?
Naturally, the question arises, why do we need this procedure if the cost of the enterprise remains unchanged? The main reason for splitting shares is to increase their liquidity. A noticeable increase in the value of assets does not make securities more attractive to investors. No one will want to buy a stock for a lot of money, if this amount can buy the assets of different companies with similar profitability forecasts. And most small investors may not even have enough money to buy such an expensive stock.
As a result, liquidity decreases, and accordingly, the company’s capitalization begins to fall. In this case, crushing also helps. Lower prices can make stocks more attractive in the market and accessible to any investor.
The increased demand for the company’s assets can also provoke an increase in quotations, which is used by traders on the stock exchange. They buy shares after the split procedure, and then sell them at a good profit after their growth begins.
At the same time, not every concern or enterprise goes to such procedures, even if the price of their shares becomes quite high. Many CEOs believe that splitting and consolidating stocks can trigger speculators ‘ interest in their assets. They consider their shareholders to be equal partners and do not want to cooperate with other co-owners of the business.
Features of performing a split on charts
During the split process, the reflection of new securities quotes on stock exchange charts is quite problematic. A sharp decline on the chart is not profitable, and this situation may scare off potential novice investors. Looking at such a chart, they will not understand the situation, just do not want to deal with a company whose shares have collapsed several times.
As a result, for the managers of such a company, the situation may turn out not to improve liquidity and demand for shares, but to lead to a completely opposite picture. To prevent such situations, after the securities are split, the quotation chart changes automatically, showing past data reduced by similar proportions. The graph is obtained without any special differences.
Therefore, if a certain stock seems unnecessarily expensive compared to its current value, you should not assume that the company is in crisis. The company may have recently conducted an asset splitting procedure, and the chart shows the current price without taking into account what it was before.
Investors know what a split is on the stock exchange, so quite often many of them focus on companies whose assets they plan to split up over the next few months. You can choose high-priced securities that continue to grow in value. In this case, the company may plan to split its shares. On the corresponding resources, you can study the list of candidates for a split of shares. This is a great option for beginners in the market.
When the investor has finished studying the list of enterprises that are ready to split assets, it is recommended to clarify the nuances of their activities in more detail. Only after conducting a qualitative assessment of candidates can you start forming positions in their assets.
The decision to split securities may be made by shareholders for various reasons:
- the asset price is too high;
- the desire of the enterprise to get into the first ranks of the largest corporations;
- reduction of dividend payments due to the division of securities, which in the future will allow you to better dose subsequent payments.
But in general, the reasons for conducting a split and the size of the coefficient of the procedure are individual for each company.
What is reverse split?
Reverse split, also called stock consolidation, is the opposite of splitting assets. In this case, the number of shares decreases, and their price increases in the same proportions. But as in the case of a split, the financial result will remain unchanged.
Reverse split of shares-these are certain stages of the procedure:
- at the shareholders ‘ meeting, the issue of the possibility of holding a split is raised;
- the decision is made by voting;
- signing the document and sending it to the appropriate registration authority;
- the crushing procedure is carried out;
- at the last stage, all changes to the company’s charter are made and registered with the relevant authorities.
This procedure is rarely used, as the process may result in a loss of liquidity and, consequently, a drop in quotations in the future. To prevent this situation, the company will be forced to organize the consolidation of assets. However, this does not help in every situation. There is evidence that companies that have resorted to the reverse split procedure have been experiencing a decline in their prices for a couple of years.
There is nothing wrong with the way different owners make a split, for investors and the enterprise itself. Everyone in this situation gets their own benefit. And knowing the main points of the procedure and the procedure for its implementation will help you avoid rash actions in the future and keep your investment portfolio intact.