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Stock splits explained step by step

April 17, 2024
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Fred Babu
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Fred Babu

There are two types of stock splits: forward splits and reverse splits.

Did you know that companies can "artificially" increase or decrease their stock market value by increasing or decreasing the amount of shares that are available for investors to trade?

Here is a step by step explanation of how stock splits work :

 

A stock split is when a company either decreases or increases the number of it's outstanding shares (Shares available to be traded by investors publicly)

There are two types of stock splits

- Forward splits 
- Reverse splits 

 

Forward splits are usually more common.

They increase the amount of shares outstanding and decrease the price per share proportionately.

This is commonly done to make the share price seem "less expensive"as the stock price shoots up in value over time.

Example:

You own 100 shares of XYZ stock trading at R10 per share ( R1000 market value )

After a 2:1 split, you would now have 200 shares of XYZ stock trading at R5 per share ( Market value is still at R1000 since 200 x 5 = 1000 )

 

Reverse splits are the opposite.

They decrease the amount of shares outstanding and increase the stocks price in direct proportion.

Usually done to keep the share price above a certain amount so that the stock can remain listed on the exchange ( ie: JSE or NYSE )

Example:

You own 100 shares of XYZ stock trading at R10 per share ( R1000 market value )

After a 1:5 reverse split, you would now have 20 shares of XYZ stock trading at R50 per share ( Market value is still at R1000 since 20 x 50 = 1000 )

 

Note how the "actual" market value of the shares or company do not NOT change and your percentage ownership doesn't change since everyone that holds shares experiences the split exactly the same.

Splits only affects:

- the price of the share
- the amount of shares outstanding

 

Note that the company is not "issuing" more shares either.

Meaning, they are not coming out with brand new shares of the stock, that would affect ownership percentage.

Think if it like this:

Just because a pizza has more or less slices doesn't mean there is more or less pizza.

 

 


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