What usually happens to a stock after a stock split?
i know that they split the shares, but what are the effects of that on the stock itself? I just looked at some charts of stocks and saw that some stocks were split at a point in time. Does that mean that a stock might go up or down? Or is there no correlation between that whatsoever?
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Stock split refers to a corporate action that increases the number of shares in a public company. The price of the shares are adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included.
Take, for example, a company with 100 shares of stock priced at $ 50 per share. The market capitalization is 100 × $ 50, or $ 5000. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $ 25. The market capitalization is 200 × $ 25 = $ 5000, the same as before the split.
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 that stock splits, in and of themselves, lead to higher stock prices; research, however, does not bear this out. What is true is that stock splits are usually initiated after a large run up in share price. Momentum investing would suggest that such a trend would continue regardless of the stock split. In any case, stock splits do increase the liquidity of a stock; there are more buyers and sellers for 10 shares at $ 10 than 1 share at $ 100.
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 conveying its confidence in the future prospects of the company.
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