Stock Split

Definition

A Stock Split is a corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares. * The Pizza Analogy: Cutting a pizza into more slices doesn't increase the size of the pizza. It just creates more, smaller slices.

The Rationale (Why do it?)

The primary motive is to make shares more affordable to retail investors. * Psychological Barrier: If a stock trades at \$1,000, it feels expensive. If it splits 10-for-1 to trade at \$100, it feels "cheap" and accessible, attracting more buyers. * Liquidity: Lower prices generally lead to higher trading volumes and tighter spreads.

The Impact

• Market Cap: Remains Unchanged. The total value of the company is exactly the same before and after the split.
• Price per Share: Decreases proportionately (e.g., in a 2-for-1 split, the price is halved).
• Shares Outstanding: Increases proportionately (e.g., in a 2-for-1 split, the number of shares doubles).

Reverse Stock Split

The opposite action, where shares are merged to form a smaller number of proportionally more valuable shares. * This is often a Red Flag. Companies usually do this when their stock price has fallen so low (Penny Stock) that they risk being delisted from major exchanges like the NYSE or Nasdaq.