A share split or a stock split is what happens when a company divides its existing number of outstanding shares into more shares. So a two-for-one share split would mean that every existing would be split to two.
In other words, if a company had five million shares outstanding before a split, it would have ten million shares outstanding after a two-for-one share split. If it had made a three-for-one split, there would be 15 million shares outstanding, and so on.
After a share split, the price of each share should be reduced in proportion to the number of new shares created. So, in a two-for-one share split, the price of each share should halve. But since the number of shares outstanding has doubled, the market value of the company is unchanged. The upshot is that to the company, a share split should not make a jot of difference to its market value. But to private investors, it can make a lot of difference – the shares are immediately more affordable.
Companies will generally split their shares when they reckon that the share price has risen too high. A high share price could make it harder for private investors to buy and sell the shares. So a share split should make the equity in the company more marketable and liquid. That should, in turn, provide a better reflection of the value of the business.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.