What does stock split mean?

Splits are a rare decision that a company decides to apply to its share price. The same occurs when a company divides the price of its shares in order to make them more attractive in the eyes of the investors.

These divisions are generally made in a 2 to 1 (2: 1) ratio, that is, two shares after the split is performed are equivalent to one share prior to it. But the ratios can be 3 to 1, 4 to 1, 10 to 1 etc.

The subsequent price is lower than the one it had before in the same relationship as the Split and the number of shares added to the investor’s account is the same amount as that of the Split made. If the Split is 2 to 1 the actions are doubled.

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In dollars, there would be no direct modification to the position in theory from one day to the next due to this effect, but there are some essential aspects that make up the dynamics of the splits itself that investors weigh positively and that will ultimately have an indirect impact on the price.

Eugene F. FamaEugen, empirically confirmed that this is true: the share price increases after an announcement and in the days before the split, discounting the positive impact on the price and also on the unconscious of investors that a share was worth a certain price before the split and that it has to return to that price at some point as if it had fallen without a valid reason and that it is “cheap” when in reality it is a mere accounting entry.

The Split is carried out by some companies when the price of their shares reaches a very high value and to make it more attractive to investors they divide the price of these in half in the case of 2: 1. For example, if someone owns one hundred shares of company $ABC that are trading at $100 and the company decides to do a 2: 1 split after it takes place the new share price will be $50 but now that trader will have 200 shares instead of 100 that had previously.

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What does a stock split mean for an investor?


As can be seen in this example, it is a purely accounting effect that does not affect the money invested from one day to the next one. But be careful that, in general, when a company makes a split, the price of its shares tends to rise in the previous days, anticipating what will come next: that the share becomes more accessible to a greater number of investors. Some companies even split when they are worth more than several thousand dollars and they become more feasible to be incorporated into small portfolios. To maintain the volume in dollars traded from one day to the next, the amount of shares traded would be exactly double if the split were 2: 1.