Stock splits occur when a company perceives that its stock price may be too high. It happens when a company issues two or more new shares for every existing share an investor holds. Stock splits are usually done to increase the liquidity of the stock (more shares outstanding) and to make it more affordable for investors to buy regular lots (a regular lot = 100 shares). They are done to improve the liquidity of the shares. Companies tend to want to keep their stock price within an optimal trading range. It is performed because a company’s stock is outperforming the company’s goals. The main advantage of stock splits is its ability to facilitate improved liquidity of shares. Following a stock split, shares are more affordable to the investors due to the reduced share price. Stock splits are practiced by many large scale companies such as Coca-Cola and Wal-Mart.
Stock splits increase the number of shares outstanding and reduce the par or stated value per share of the company’s stock. For example, a two-for-one stock split means that the company stockholders will receive two shares for every share they currently own. The split will double the number of shares outstanding and reduce by half the par value per share. Existing shareholders will see their shareholdings double in quantity, but there will be no change in the proportional ownership represented by the shares. For example, a shareholder owning 2,000 shares out of 100,000 before a stock split would own 4,000 shares out of 200,000 after a stock split.
