What is a ‘Stock split’?

A stock split is a corporate action where a company increases or decreases the number of its outstanding shares without affecting the company’s overall value. This is similar to cutting a pizza into smaller or larger slices. The size of the pizza (the company’s value) remains the same, but the number of slices (shares) changes.

What do ‘Reverse’ and ‘Forward’ Indicate in a Stock Split?

• Forward Split: This is the most common type of stock split. In a forward split, a company increases the number of its outstanding shares by dividing each existing share into multiple new shares, which reduces the price per share. This is typically done to make the shares more affordable and increase their liquidity.
• Reverse Split: In a reverse stock split, a company reduces the number of its outstanding shares by combining shares. This increases the price of each share. Companies might do this to meet stock exchange listing requirements or to attract a different type of investor.

Stock split examples:

• Forward Split Example (1 to 2): If a company announces a forward split with a ratio of 1 to 2, it means each share you own will be split into 2 shares. If you owned 100 shares before the split, you would own 200 shares after the split. The price of each share would be halved.
• Reverse Split Example (2 to 1): If a company announces a reverse split with a ratio of 2 to 1, it means every 2 shares you own will be combined into 1 share. If you owned 100 shares before the split, you would own 50 shares after the split. The price of each share would be multiplied by 2.

Does a stock split affect the value of my investment?

No, a stock split does not change the market value of your total investment or the company’s market cap. It’s simply a cosmetic change that affects the price per share and the number of shares outstanding.

Are there any risks associated with stock splits?

Stock splits themselves do not typically pose a risk to investors, as they do not fundamentally alter the company’s valuation. However, market perceptions and other external factors can impact stock prices post-split.

How does a stock split affect dividends?

The total dividend payout after a stock split to shareholders will remain the same. This means that the dividend yield (dividend per share divided by the stock price) will not be affected by the split and the total dividend amount you receive should remain the same.