Let's use Apple's most recent 4-for-1 stock split as an example. For simplicity's sake, say you have one share in Apple's stock. Via its 4-to-1 split, Apple grants you three additional shares totaling four , but each share is then valued at a quarter of the original.
The four shares are worth the same as the one share pre-split. For existing shareholders, the result is the same — the total value of the shares remains consistent. There are just more pieces of the pie, so to speak. For new investors, an announcement of a stock split can signal a time to buy, since a lower price per share means buying at lower prices.
Overall, stock splits signal to the market that the company's share price is growing and the company's optimistic it will continue to do so in the future. There are many reasons why a company may consider a stock split. Since stock splits don't add economic value, much of it comes down to making the stock more attainable to everyday investors, and the behavioral benefits of that. Generally speaking, a traditional stock split is considered a good thing. But there's also what's called a reverse stock split, and as you might guess, it's the opposite.
A reverse stock split occurs when the quantity of outstanding shares is reduced and the stock's price is increased.
Though regular stock splits, also known as forward splits, are a positive indication of the success of a company, a reverse stock split indicates a company in trouble. A business usually enacts a reverse stock split when the price of its stock has become so low that it is in danger of being thrown off a stock exchange — and not allowed to trade on it anymore.
In order to avoid being "delisted," as this dire fate is known, the company will enact a reverse stock split, increasing the stock price and ensuring it stays on the market.
Investors should commonly avoid companies that have undergone a reverse stock split, unless the company provides solid plans to improve its performance. In a stock split, a company increases the number of its shares by dividing its existing shares into more shares, thus reducing the price of each share. This results in shares that are more affordable and more attractive to investors.
When a company splits its stock, the current shareholders are not financially impacted. The value of their holdings remains the same; they just now have more shares — but at a lower price apiece. A stock split is a tactic for making a stock more attainable to smaller investors, particularly when its price has ratcheted sky-high over time. When its stock began trading, that pizza was sliced into a finite number of pieces, or shares, that were offered to investors.
If a company announces a 2-for-1 split, the number of shares doubles, so the original pie will be divvied up into 16 slices. Same amount of pizza, just a different number of slices.
That same principle is applied no matter what the split ratio is. The last stock split from Apple, for instance, was a 7-for-1 in Have an appetite to learn more? Check out some other stock market basics. This is often done to meet the minimum stock price required for a company to be listed on an exchange. Limited time offer.
Terms apply. A stock split doesn't make investors rich. Stop-loss can be defined as an advance order to sell an asset when it reaches a particular price point. It is used to limit loss or gain in a trade.
The concept can be used for short-term as well as long-term trading. The Return On Equity ratio essentially measures the rate of return that the owners of common stock of a company receive on their shareholdings. Return on equity signifies how good the company is in generating returns on the investment it received from its shareholders.
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