Why do companies opt for Stock Split?

A share split is considered a way to make investments attractive, to signal future growth and profits, and to give higher dividends to the shareholders.

Making Shareholding More Attractive

When a stock is split, the total outstanding number of shares goes up while the market price of each share goes down. This makes the shares look more attractive and affordable. While there is no change in the net income of wealthy shareholders, the stock split offers a way for smaller shareholders to afford the ownership of large shares that have been split.

In a share split, the total value of outstanding shares remains unchanged. The thing that changes is the number of shares. In a large pool of shares, more investors can buy the shares, making the number of shareholders go up which makes trading and business more affordable and less risky.

Indication of Higher Future Profits

Like bonus shares, a share split also indicates a better future of the shares. As the share value of high-growth companies rise up very fast, the investors often fail to catch up with the shares. Splitting the high-value shares offer a way to investors to invest in the shares without having to consider the superiority of the firm in the market. This helps both the potential shareholders and the company in the long run.

Like bonus shares, a share split also has an informational value. It is considered as a sign of future high values of the shares for which the companies split them. Therefore, the companies that split their shares earn a good reputation in the market which helps them to earn further investments easily.

Increase in Dividend

The companies that split the shares do not offer dividends but the value of dividends goes up automatically after a share split. As the number of shares held by the investors goes up, the dividend per share also goes up. This trend of increasing dividend per share increases the wealth of the shareholders. However, it is noticeable that increasing the number of shares has no effect on share pricing; it is the nature of increased shares that increases the dividends for the shareholders.

Conclusion

A stock split is a quick and efficient way to improve the bottom-line of share statistics. However, companies must be alert and aware of the dangers while splitting the stocks. If there is no future growth, splitting the stocks may bring down the stock value in the market significantly, even leading to bankruptcy. Therefore, although stock splitting has its own merits, it should be done when the company is fully prepared for the changes that such a stock split brings with it.

Probir Banerjee

Updated on 25-Mar-2022 05:22:18

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