Stock Split Essentials Explained: Everything You Need to Know
A stock split is a corporate action that occurs when a company divides its existing shares into a larger number of shares, typically by a specified ratio.This process is often used by companies to adjust their share price and share count for various reasons.
When a stock split takes place, the company increases the number of its outstanding shares by dividing its existing shares into multiple ones. For example, a two-for-one stock split takes an existing share and splits it into two, adjusting the price by half. Similarly, a three-for-one stock split takes one share and splits it into three, adjusting the price accordingly.
Stock splits can have an impact on stock market trading, as they increase the number of shares available while proportionally adjusting the share price. This can affect the trading of options contracts and other investment strategies.
Companies use stock splits as a way to cosmetically alter their share price and outstanding share count. Despite not changing the underlying business fundamentals of a stock, stock-split stocks tend to outperform over the 12 months following a split.
One recent example of a company considering a stock split is SoundHound AI. Stock splits are tools companies can use to change the share price and share count of their stock for a variety of reasons.
Investors and traders may be wondering if it's a good time to buy shares of companies that have recently undergone a stock split, such as Interactive Brokers. While a stock split does not change the fundamentals of a stock, stock-split stocks tend to outperform in the year following a split.
There are different types of stock splits, including forward splits and reverse splits. A forward stock split increases the number of outstanding shares while reducing the price per share proportionally. On the other hand, a reverse stock split reduces the number of outstanding shares while increasing the share price proportionally.
It's important for investors to understand how stock splits work and what impact they may have on their investments. Companies like Stem, Inc. and Revelation Biosciences Inc. have recently announced reverse stock splits, which will affect the number of authorized shares and outstanding shares of their common stock.
In conclusion, stock splits are a common corporate action used by publicly traded companies to adjust their share price and outstanding share count. While stock splits do not change the underlying business fundamentals of a stock, they can have an impact on stock market trading and investment strategies. Investors and traders should carefully consider the implications of stock splits before making investment decisions.
