2017

Sep
5

What is the split (crushing) stock

What is the split (crushing) stock

Split stocks — the method of attracting additional investors by the deliberate lowering the market price of a stock and a proportional increase in the number of shares in circulation.

Split stocks or a stock split used joint stock companies in order, to make the campaign more attractive for private investors. But this is not through advertising, and with the help of the artificial lowering of the market price.

What is a stock split?

Split — increase in the number of shares by dividing them in a certain proportion. By crushing the number of shares increases, the cost is reduced, and the capitalization of the company remains the same (remember the example with the bills). For example, in case of division in the ratio of 2-to-1 the number of shares the investor is doubled, and the cost is reduced by half: two new shares at a price equal to one to split.

Suppose, a company issued 10 million shares. Currently they are traded at $40 apiece. Thus, total capitalization is 400 million dollars ($40*10 million shares = 400 million).

The company decides to hold a crushing 2-to-1. To each of the existing shares, the investor receives one directly to a brokerage account. Now he has two times more papers, however, their value fell by 50% — $40 to $20. Note, capitalization remains the same ($20*20 million = 400 million). The real value has not changed.

The most common splits are in the proportion of 2-to-1, 3-K-2, 3-K-1. The easiest way the cost of the new shares it is possible to calculate, dividing the current price for crushing ratio. In our example $40 should be divided into 2, and we get a value after the split $20. If the shares were split 3-to-2, their final price would be $40/(3/2) = 40/1,5 = $26,6.

Sometimes companies conduct reverse splits. In this case, the number of shares outstanding decreases, but the final cost grows. For example, if the company decided to conduct a reverse split of 1-to-10, then for every 10 shares in the portfolio, the investor will receive one new. The table helps to understand, what happens to the price, number of shares and capitalization of the company in carrying out various fragmentations.

Capitalization does not change

For understanding stock splits it is necessary to understand the commutative law of arithmetic: from change of places composed the sum does not change. The amount in this case, the company's market capitalization (ie. the total value of all shares). In other words, regardless, how the number of shares and price, when split, the market capitalization remains unchanged.

Example of stock split

Best split to show the example. For example, the market is in circulation 1 million shares of AAA, the cost of which is to split 1000 UAH. In order to make the event cheaper, our fictitious company AAA decides to implement the split or fragmentation of its shares in the ratio n to 1. (The concept of relationship or coefficient integral from split as such. Often made splits 5 to 1, 2 to 1 etc.) Thus, the split affected the market the following:

  • the number of issued shares is increased to n times
  • market price of the share divided by n

Thus, if the split was 5 to 1, all shareholders would see in my terminal, what they own in 5 times a large number of stock. But at the same time, the market price of each share would have been reduced to 5 times, and would 200 UAH. The capital has not changed after crushing, because. 10 shares 1000 UAH. anyway 50 shares 200 UAH.

Why do we need a stock split

As a rule, need to stock split occurs when a share price much higher, or significantly exceeds the share prices of competitors in the industry. Obviously, that most private investors share in 1000 UAH. too attractive. But if many investors refrain from investing in the company and its funds, it, of course, has a negative impact both on market value and liquidity of the shares.

In other words, cutting off a layer of private investors, the company deprives itself of access to a large capital. But in order to regain liquidity and the demand of additional niches (ie. private investors), the companies resort to stock split.

The first reason is psychological. As rising prices, investors begin to consider the stock too expensive to buy. Crushing reduces their cost to a more attractive level. The real value of the shares does not change, but their lower nominal value can affect the perception of investors and attract new buyers. For existing shareholders, the increase in the number of stocks in the portfolio becomes just a nice bonus.
The second reason — a stock split increases liquidity by increasing the number of outstanding securities. Some expensive stocks the difference between the price of supply and demand sometimes reaches a considerable value.

After the split the share is growing

When the price per share decreases, investors, previously unavailable, begin to buy it, thereby increasing demand. The increased demand will pull the stock price up. Thus, after a split, the price rises in most cases.

The influence of crushing on the price chart

Obviously, what, if a potential investor, by studying the action on the chart, will see a sharp drop 1000 to 200 UAH., he is quite skeptical of this action, and hardly it will consider as a potential investment. Moreover, those shareholders, which are not found out in time about the split, upset (to put it mildly) and arrange Bedlam in the market, if they find out, as the night fell in 5 times.

Well, really, is it fair to reflect on the chart this monstrous fall, which, in fact, not real? After all — we must remember — market capitalization from crushing does not change.

To solve this subtle question came up tn. "adjusted closing price". This concept is applicable to technologies, which displays a graph of the action on the screen. In this mode, the program displays the customized data before the split, ie. it divides all closing prices before the split by a factor of crushing. Ie. if yesterday the price was 1000, and today was a double split, it, looking at the chart with adapted prices, and today's and yesterday's prices on today's chart will be 500. (In Ukraine, this technology is not in use, unfortunately; at least, I don't know any web service, that would be such a calculation.)

Conclusion

Split or a stock split — the phenomenon, attractive to a private investor. A stock split changes the market value and number of shares in inverse proportion, corresponding to the ratio of split, thus not affecting the capital. When you see a sharp drop on the chart action, remember, what can it be split: pick up the story of the campaign and check.

Learning stock trading on the NYSE, Nasdaq, Amex

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