What is Stock Split?

Stock split:
An issue of new shares in a company to existing shareholders in proportion to their current holdings.
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In case of publicly traded company, whose shares are traded in stock market, a stock split increases the number of  outstanding shares of the company by issuing new shares to the current share holders. In this corporate decision a company divides its existing shares into multiple shares. The total monetary value of the shares remains same compared to pre-split amount. This happens because the split did not add any real value no matter how much is the ratio of stock split is. Here stock split ratio means the ratio by which current stock is given addition more stock. If 'S' share holder has 10 stocks of 'X' company then if the board members of the X company make a decision to split stocks by 1:2, then after the split 'S' has 20 stocks.

There are so many companies that makes the decision of stock split. Here a list from msn:

JUNE 2014

COMPANY	SYMBOL	SPLIT EFFECTIVE	RATIO	ANNOUNCED	OPTIONABLE
Splits Payable: Jun 2
FIRST FINANCIAL BANKSHARES INC	FFIN	Jun 3	2-1	Apr 22	No
Splits Payable: Jun 5
INOVIO PHARMACEUTICALS Inc	INO	Jun 6	1-4	May 23	No
Splits Payable: Jun 6
APPLE Inc	AAPL	Jun 9	7-1	Apr 23	No
UNION PACIFIC Corp	UNP	Jun 9	2-1	May 15	No
Splits Payable: Jun 12
SUNOCO LOGISTICS PARTNERS L.P. COMMON UNITS REP Ltd PARTNER INT.	SXL	Jun 13	2-1	May 6	No
Splits Payable: Jun 16
ALLIANCE RESOURCE PARTNERS LP	ARLP	Jun 17	2-1	Apr 28	No
Splits Payable: Jun 17
DOMTAR CORPORATION (NEW)	UFS	Jun 18	2-1	Apr 30	No
Splits Payable: Jun 19
TRINITY INDUSTRIES Inc	TRN	Jun 20	2-1	May 5	No
Splits Payable: Jun 23
BANK OF THE OZARKS INC	OZRK	Jun 24	2-1	May 19	No
Splits Payable: Jun 25
CELGENE CORP	CELG	Jun 26	2-1	Jun 19	No
Splits Payable: Jun 26
CORE MARK HOLDING CO. Inc	CORE	Jun 27	2-1	May 21	No
MIDDLEBY CORP	MIDD	Jun 27	3-1	May 30	No

 All of these splits has been executed already. After the number of shares that changes due to stock split lets talk about price. For example, lets say a price of a stock of 'X' company is $10 and stock split is 2:1. The price changes by $10* 1/2= $5 per share. This means the total value of the stock remains same as the number of stock after split will be 2x10=20 and price before split will be $100 and price after split will be $5x20 =$100.

This does not effect the overall value of the company and still the decision is carried out. Board of directors are responsible for making such decision and they represent groups of shareholders. This decision of the BOD allows the shareholder an easy way to liquidate their shares as the price goes down. Shareholders put forward the proposal for stock split if it's necessary, i.e. in situations when the prices are too high resulting in scarcity of low quantity purchasing buyers. So, it's decision of the shareholder more then the decision of the company. This is what we refer to as liquidity.

Further more, people associate stock split with psychological effect too. The stock split announcement draws attention to a company's success. This results in increased buying and higher prices. Now behavioral finance is trying to explain it with rationality.

In addition to that he recent split of Apple has given a significant effect of stock split. “We’re taking this action to make Apple stock more accessible to a larger number of investors,” Apple CEO Tim Cook said in April. The split was announced on April 23 and executed on June 9. The ratio was 7 for 1 and it was highlighted as  Apple’s 7-for-1 Stock Split Is ‘Very Unusual’ by THE WALL STREET JOURNAL. In April 23 Apple stock closed at $74.9643. Then something amazing happened. It started to rise. On June 27, it closed at $91.98 in NASDAQ

Click to enlarge.

Many companies routinely exceed the price level at which they had previously split their stock and this will again introduce stock split. Wal-Mart has split its shares as many as 11 times on a 2-for-1 basis from the time it went public in October 1970 to March 1999. Google also had stock split early in April.

However, there are companies that has no stock split. Berkshire Hathaway has never had a stock split. Its bid spread can often be over $100, its class A shares were trading at $190,559 each.

Latest news: iGo, Inc. Announces Reverse/Forward Stock Split. There are possibilities for traders by purchasing low and selling high. Hope you find your luck. Please your view in the comments.