Investors may choose to invest in company stocks for many reasons. Owning shares of a corporation may come with special benefits, depending on the number of shares an investor has purchased. Regular dividend payments and voting rights are perks that are only available to shareholders. Like every other publicly traded investment, the price of company stock shares fluctuates with the market throughout each trading day. Change in prices can also be caused by other events. Mergers, issuance of new shares, and other company decisions can drastically affect the price of company stock shares. Stock splits are another cause of change in price and possibly the number of shares owned by an investor.
What is a Stock Split?
In simplest terms, a stock split is an increase of shares outstanding without any new purchases. Imagine a share of stock was a piece of paper. The company that issued the piece of paper to the investor would simply tear it in half and pronounce that an investor now owns two shares instead of one. This example represents a two-for-one split, which is generally the most common. Current shareholders have virtually doubled the number of shares owned overnight. Twice as many shares of company stock are outstanding after a two-for-one split.
Why do Stock Splits Happen?
A corporation can make decisions about their publicly-traded company in a few different ways. The Board of Directors can make decisions behind closed doors. They may hire advisors from varying specialties to make recommendations. Most corporations also make decisions or changes in their processes due to consumers. The customer experience is a high driving influence for most national and international companies. The decision to introduce a stock split is complex and will be affected by several factors.
When the Board of Directors and other reviewers examine their own company stock in comparison to similar publicly traded companies, they look for similarities and differences. Stock prices should be within range for similar companies, but will naturally ebb and flow in conjunction with company performance and announcements. If a particular pharmaceutical company or retail outlet notices that their own outstanding shares have doubled in price or far outpace the price of a competitor’s stock, they may decide to implement a stock split. This decision will decrease share price, making it more palatable for new and smaller investors.