What
would be your reply in a situation where you have a 100$ bill to pay
and someone offered you two bills of 50$ each to pay replacing the
original one. Would you accept that offer? This might sound a pointless
exercise to some of you but analogy of stock splitting is same. Let’s
take a deep look on stock splitting to understand what stock splitting
means, why it is done and what it means to investors.
What is Stock Splitting?
Stocks
splitting can be understood as a corporate action that increases the
number of outstanding shares for a corporation by dividing each share
and which indirectly diminishes its prices. However, stock’s market
capitalization remains same just like when dividing the 100$ bill into
two parts does not change the overall bill to pay. Some of the most
common stock splits are 2-for-1, 3-for-2 and 3-for-1.
Let’s
take an example, suppose stock A is currently trading at $40 and
company has 10 million shares issued. Simply means company is having
market capitalization of $400 million ($40 x 10 million shares). Now
further, if company decides to implement a 2-for-1 stock split then for
each share owned shareholders will receive one additional share,
deposited directly into their brokerage account. They will be having now
2 shares for each 1 previously held, but twist is that the price of the
stock will also be reduced by 50%, from $40 to $20. You can notice that
the market capitalization remains the same – as it has doubled the
amount of stocks outstanding to 20 million while in chorus reducing the
stock price also by 50% to $20 for a capitalization of $400 million. The
true value of the company hasn't changed at all. This is stock
splitting.
In
an easy way if you want to determine the new stock prices after
splitting, divide the stock price by the splitting ratio. Also there is
another term i.e. Reverse Stock Splitting and the most common example of
reverse splitting is 1-for-10 means that for every 10 shares you own,
you will be receiving 1 share extra.
Why it is done?
Now
question arises that why stock splitting is done? The first obvious
answer is to hit on the psychology of the investors. Another reason that
is perhaps more logical one stocks are splitted to increase a stock’s
liquidity.
What it means to Dividend Investors?
Stock
splitting is a good buying indicator for dividend investors in UK as it
signals that company’s stock price is increasing and a good one to buy
at the moment.
Get dividend data for all the stocks listed in FTSE indices( like FTSE 100, FTSE 250 ), on the London stock exchange of UK by dividendinvestor.co.uk.
Get data like dividend yield, dividend dates, dividend payout changes,
yield%, dividend history, consecutive dividend increase, 52 week
high/low data, ex-dividend date etc. Track your favorite dividend stocks
in UK By Tracker Tool. Find best dividend yield paying ftse stocks by screener tool.
Related Tags: FTSE 100 Dividend Stocks To Buy : High Dividend Yield FTSE 100 Stocks
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