What is a stock split and how does it work?

June 10, 2024 at 11:45AM
Nvidia will start trading today around 120$ after the 10:1 stock split. Let’s see what is a stock split and how it works.

In order to
increase the share’s liquidity and make it more affordable, a corporation may split its existing shares
into many shares, a move known as a stock split. Because the
split adds no actual value, even though the number of shares outstanding rises,
the shares’ total dollar worth stays the same. In essence,
a stock split results in an increase in the company’s share count but also a corresponding decrease in share price.

How does it work?

Announcement:
A stock split with a specified ratio (such as 2-for-1, 3-for-1, etc.) is
announced by the corporation.

Change of
Share Count: The split ratio is multiplied by each shareholder’s share count.

Share Price
Adjustment: The split ratio is used to divide the market price of the shares.

Market
Capitalization: Following the split, the company’s overall market
capitalization stays the same.

Let’s see an example with Nvidia’s 10-for-1 stock split:

Pre-split

A
shareholder has 100 shares.

A share costs $1200.

Shares
total worth is equal to 100 shares * $1200, or $120,000.

HUBFX

After-split

A 10-for-1
split is announced.

10 shares
are divided from each share.

Now, the
shareholder has 1,000 shares.

One share
now costs $120 (1200 / 10).

Shares
total worth is equal to 1000 shares * $120, or $120,000.

What makes
the stock split historically positive?

Sign of
confidence:

Stock
splits are usually announced by companies after a major increase in share
price. This could be seen as an indication that the business is optimistic
about its chances for future growth.

Enhanced
liquidity:

The number
of outstanding shares rises when the stock is split, which may enhance
liquidity. More shares at a reduced price could draw in more investors, even
retail ones who might have been crowded out previously.

Perceived
bargain:

Reduced
share prices may increase demand by making the stock seem more accessible to
small investors. Investors may view a company priced at $50 as more affordable
than one priced at $200, despite the fact that the stock’s fundamental remains the same.

Psychology:

Historical
evidence shows that stocks often do well after a split, owing to increased
investor interest and psychological impact. This can result in a
self-fulfilling prophecy in which growing demand drives prices upward.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

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Payment services for HUBFX are provided by The Currency Cloud Limited. Registered in England No. 06323311. Registered Office: Stewardship Building 1st Floor, 12 Steward Street London E1 6FQ. The Currency Cloud Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 for the issuing of electronic money (FRN: 900199) and The Currency Cloud Inc. which operates in partnership with Community Federal Savings Bank (CFSB) to facilitate payments in all 50 states in the US. CFSB is registered with the Federal Deposit Insurance Corporation (FDIC Certificate# 57129). The Currency Cloud Inc is registered with FinCEN and authorized in 39 states to transmit money (MSB Registration Number: 31000160311064). Registered Office: 104 5th Avenue, 20th Floor, New York , NY 10011 and CurrencyCloud B.V.. Registered in the Netherlands No. 72186178. Registered Office: Nieuwezijds Voorburgwal 296 – 298, Mindspace Nieuwezijds Office 001 Amsterdam. CurrencyCloud B.V. is authorised by the DNB under the Wet op het financieel toezicht to carry out the business of a electronic-money institution (Relation Number: R142701)

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