What are stocks splits and reverse splits? How do they affect stock or share prices.

Any company can do a stock ‘split’ when they feel the time is right. Usually this involves the company doing good profitable business over a prolonged period of time. The stock split is where the company simply issues more shares to the current shareholders. A 2 for 1 split is the most common. So for example you own 100 shares in sat Dell computers and they decide to split 2 for 1 you immediately become the proud owner of 200 shares.

Unfortunately the value of your total shareholding in Dell does not double with a 2 for 1 split. Rather the face value of the shares is halved so that each shareholder stock value does not alter. Companies often make this move if the share price has become too high. By halving the share price overnight the company is bringing the stock within range of smaller stock market traders. With the opening up of this market sector the demand for the shares will increase. The supply of shares for sale on the open market does not increase therefore the laws of supply and demand cause the share price to rise.

Too high a stock price is a problem for companies because it reduces the demand for their stock and makes market capitalization more difficult than it should be for a successful company.

A stock split can be done in any proportion that the company chooses. It could do 10 for 1 for instance. Where I held 1 share I would now hold 10 in this case and the face value of each would be one tenth of what it was. A reverse split, much more unusual but none the less possible, would be just what it sounds like. A 1 for 2 reverse split means where I held 100 shares I would now hold 50 shares. Again the overall value would remain unchanged, as the face value would double in this case.

From the individual stockholder perspective nothing changes with either a standard stock split or a reverse split. But from the perspective of a potential stock buyer the stock become more attractive and the demand rises. It is also a minor public relations coup as financial journalists and stock watchers see it as a positive move. In effect the management are signaling their belief that the stock will continue to appreciate in value. But only time and economic tides will tell.


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