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Pros and cons of stock splits Pro: Makes shares more affordable. ... Pro: May trigger renewed investor interest. ... Con: Could trigger volatility. ... Con: Does not add any new value: At least in the short term, the total value of your assets for the stock in question remains the same.
A stock split is typically done to increase the liquidity of a company's shares. When a company's stock price gets too high, fewer buyers will pay that high price. By splitting the stock, the company essentially lowers the price per share, making it more affordable and attractive to potential investors.
Let's look at a common scenario, which is a 2-for-1 split: Investors receive one additional share for each share they already own. The stock price is halved?$50 becomes $25, for example?and the number of shares outstanding doubles.
A: The primary purpose of a stock split is to make the stock more accessible to a larger number of investors by reducing the share price. This can also have the effect of increasing trading volume and liquidity, as well as making the company appear more attractive to investors.
When a stock splits, it can also result in a share price increase?even though there may be a decrease immediately after the stock split. This is because small investors may perceive the stock as more affordable and buy the stock. This effectively boosts demand for the stock and drives up prices.
Or, in a 3-for-2 split, the company would give you three shares with a market-adjusted worth of about $66.67 in exchange for two existing $100 shares, leaving you with 15 shares. While you now have more shares than you started with, the total value of those shares is the same as it was before the split: $1,000.
Companies might split their stocks when they believe the share price is too high for most people. By splitting stocks and cutting the price per share, they're opening up the opportunity for more potential investors to buy into the company.
In a stock split, the corporation issues additional shares to current shareholders, but your total basis doesn't change. Following a stock split, you must reallocate your basis between the original shares and the shares newly acquired in the stock split.