1

Categories

August 25, 2020

FXPRIMUS, Understanding Stock Split - What is Stock Split and what happens to the market?

What is Stock Split? Explaining the Stock Split's mechanism, merits, and demerits for investors.

Understanding-Stock-Split---What-is-Stock-Split-and-what-happens-to-the-market Understanding-Stock-Split---What-is-Stock-Split-and-what-happens-to-the-market

What happens with Stock Split of Apple and Tesla?

Here is what you need to know ahead of the upcoming splits.

If you’re not following tech stocks too closely, then you may not be aware of Tesla’s and Apple’s upcoming stock splits.

As of August 31st, Tesla shares will be split 5-for-1, and Apple’s 4-for-1, which means two things:

  1. existing shares of each company are now multiplied by 5 and 4 respectively;
  2. and their share prices are divided by those same values.

Why would they do that?

Companies may decide to hold stock splits for one or both of these reasons: multiplying shares creates more available shares; i.e. increasing liquidity and the opportunity to own stock, while a lower share price makes doing so more affordable.

The two balance each other out so market cap (the company’s overall value) isn’t affected.

How does this affect me?

As FXPRIMUS offers CFD trading, both Tesla and Apple will be close-only on August 28th, and any positions still open after Friday’s trading sessions ends will be closed, executed at the day’s closing price.

Both will be available for trading from Monday, August 31st, at the split prices.

Go to FXPRIMUS Official Website

What is Stock Split first of all?

A stock split is to “split” a “stock” literally.

For example, if you own 30 USD worth of stock and a company decides to split at “1:3”, the number of shares you hold will change from 1 to 3 shares.

However, what was 30 USD per share so far does not convert to 90 USD for 3 shares, but 30 USD for 3 shares, so no change in assets will occur.

In other words, it refers to the division of one share into smaller pieces without changing the capital stock.

This is one of the categories of new stock issuance.

In this way, since the number of shares held by the shareholders will be increased free of charge, it is also called “free share allocation”.

Stock splits often bring benefits to companies and investors.

The main advantages are higher stock prices and increased capital for the entire company.

However, since the company has to carry out the prescribed procedure and informs the shareholders, it is a time-consuming task.

As the number of shareholders increases, the number of destinations to send information such as general meeting of shareholders will increase accordingly.

Go to FXPRIMUS Official Website

2 Merits of Stock Split in general

So why do we need to split our stock? Stock split has two major advantages.

In the case of the previous example, “1:3” split, the stock price will fall, but the number of tradable shares will increase.

The first advantage is that the number of issued shares will increase, making it easier for investors to buy and sell and increasing liquidity.

If a company has a high stock price and is in a stalemate, it may be possible to increase its stock price and capital by increasing its liquidity.

In addition, since the stock price will be lower, more people will be given the opportunity to purchase the stock of the company.

In other words, it becomes possible to increase the number of people who invest in the stock of the company.

One of the purposes is to increase the assets as a whole compared to before the split.

Visit FXPRIMUS Official Website

Dividends increase with Stock Split

While those are the main benefits of a stock split, they may have additional benefits for investors.

It is a well-known fact that if you hold shares, you can receive dividends, but if the company that splits the stock holds the dividend amount, the number of shares that receive the dividend will increase accordingly.

The stock price has no merit in terms of assets, but results in an increase in dividends due to the split.

Furthermore, since the number of shares held up to now will increase, it will be one of the attractions that the degree of freedom to sell some and continue to hold some will increase.

Thus, it can be said that a stock split has advantages for both companies and investors.

If the shares you hold are split, first check the rules for dividend distribution.

And the next thing that could happen is a rise in stock prices.

If you are only aiming for transfer income, you may need to consider a strategy to sell at that timing. When paying dividends or offering shareholder benefits, it is important to pay the utmost attention to subsequent movements in stock prices.

Go to FXPRIMUS Official Website

The Total Asset Value stays the same

A “stock split” in which shares are split and increased.

If you are not aware of the stock split, you may be surprised at the sudden drop in the stock price when you look at the stock list in your securities account.

However, the reason why the stock price dropped is due to the stock split, and it does not mean that the value of the stock has decreased, so you do not have to worry about it.

For example, if you own 100 shares of Company A with a stock price of 80 USD on the previous day, and if a “stock split of 1 stock into 2 stocks” is carried out, the stock price will be halved to 40 USD, but the number of shares will be 200.

In other words, there is no change in the theoretical stock price before and after the stock split.

However, in reality, the stock price may change significantly before and after the stock split.

Visit FXPRIMUS Official Website

Will Stock price go up with Stock Split?

In fact, a long time ago, stock splits were a good factor, and were a factor that caused stock prices to rise significantly.

In theory, a stock split is neutral to the stock price and has no effect on the stock price.

The possible reason for this is the advance purchase, which is expected to increase the demand for buying because the stock split makes it easier to buy the stock.

And, after the stock split actually took place, a lot of buying came in and the stock price often rose.

For example, if a stock split of 80 USD stock makes 1 stock into 4 stocks, 1 stock will become 200 USD.

If you consider 100 shares, you can buy it for 2000 USD instead of 8000 USD before the stock split.

This may be a hurdle for individual investors.

Go to FXPRIMUS Official Website

Stock price could go down after Stock Split

Looking at recent stock splits, it has been a activty that does not necessarily mean that stock prices will rise.

In some cases, the stock price does not rise after the stock split is announced, on the other hand, after the stock split actually takes place, the price goes down.

One of the reasons is that the stock split makes it easier to sell the stock.

For example, if you have 100 shares subject to a stock split and sell them, all the shares will be gone (since you buy and sell every 100 shares).

However, if a stock split is carried out to split one share into two, if you have 100 shares, you will have 200 shares, and even if you sell 100 shares, you will still have 100 shares.

If so, there should be a lot of investors who want to sell half.

In other words, whether the stock price rises or falls due to the stock split depends on which of the strong demand.

Is it the buying demand that arises when “you can buy cheaper” or the selling demand that you “sell half”?

A long time ago, many investors had the belief that there was no theoretical basis of “stock split = stock price increase”, so the stock price often increased due to the move to buy stocks for the time being.

Currently, such movements are becoming less common, and it can be said that purely new “buying demand” and “selling demand” tug of war determines how stock prices will move.

Therefore, the conclusion is that it is difficult to predict in advance how the stock price will change due to the stock split.

Go to FXPRIMUS Official Website

Looking at medium to long term trend

The above is the movement of stock prices from a short-term perspective.

So what about a medium to long-term perspective?

The stock split has the purpose of lowering the stock price when it has reached a level where it is difficult to buy because the stock price has risen significantly.

The fact that the stock price has risen significantly means that the stock’s performance is likely to be strong.

If the stock price does not rise, there is no need to split the stock.

In other words, a stock splitting stock is a good performer.

If the stock split is carried out multiple times, it can be judged that the business performance is still particularly good.

Of course, if the business performance deteriorates after the stock split, the stock price will also drop significantly, so it is necessary to pay attention to the performance trends and stock price trends.

However, from a medium to long-term perspective, it can be said that stocks that have undergone stock splits more than once are said to be “stock prices are increasing significantly = good performance continues”” and that further stock price increases can be expected.

All Forex Brokers

  • 1Market
  • 4XC (4xCube)
  • AAAFx
  • AdroFX
  • AGEA
  • AltumFX
  • ATFX
  • AvaTrade
  • Axi
  • Axiory
  • AZAforex
  • BDSwiss
  • BKFX
  • BlackBull Markets
  • BlackStone Futures
  • Capex
  • ClickTrades
  • CM Trading
  • Deriv
  • easyMarkets
  • EightCap
  • ETFinance
  • Evolve Markets
  • EXNESS
  • FBS
  • FinmaxFX
  • ForexMart
  • ForexVox
  • FortFS
  • Fortrade
  • FP Markets
  • FXCM
  • FXDD
  • FXGiants
  • FXGlory
  • FXOpen
  • FXPRIMUS
  • FxPro
  • FXTM
  • HotForex
  • HotForex ZA (South Africa)
  • HYCM
  • IC Markets
  • IFC Markets
  • InstaForex
  • IronFX
  • JustForex
  • Land-FX
  • Libertex
  • LiteForex
  • LMFX
  • LQDFX
  • M4Markets
  • MiltonMarkets
  • MyFX Markets
  • NordFX
  • OANDA
  • OctaFX
  • Oinvest
  • Olymp Trade
  • PatronFX
  • PaxForex
  • SimpleFX
  • SquaredFinancial
  • SuperForex
  • ThreeTrader
  • Tickmill
  • Tifia
  • Titan FX
  • TopstepFX
  • Trade Nation
  • Trade360
  • Traders Trust
  • Tradeview
  • UFX
  • USGFX
  • Valutrades
  • VantageFX
  • XM
  • XMTrading
  • XTB
  • YADIX

All Crypto-Currency Exchanges

  • Bibox
  • Binance
  • BitMEX
  • Bitpanda
  • BKEX
  • bybit
  • CEX.IO
  • CoinEx
  • CoinField
  • CoinPark
  • HitBTC
  • IRONX
  • Kriptomat
  • Paxful
  • PrimeBit
  • StormGain
  • Swapzone
  • Trade8
  • Wisebitcoin
  • XBTFX
  • YObit

More from our partners