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Investment Dictionary

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Stock Split


stock split is a divide of existing company’s shares decreasing its face value. For every owned share an investor gets a several (or one) additional shares depending on split ratio, and the total outstanding shares number increases proportionally. 


Usually stock splits are used after strong stock price increase when management board sees that stock price level is higher than optimal for smaller shareholders. For example if a share price is 2000$ it may be too much for retail investor whose total portfolio reaches only 5000$ and he wouldn’t like to by only one share. Even if stock price is affordable for most investors, for example, 150$, after split 5-for-1 it would trade at 30$ and might look more attractive because of psychological effect.


In an effective market stock split doesn’t have an impact to company’s market capitalization, but in less developed markets happens that after stock split capitalization increases in higher level than before the stock split. 


Stock splits do not have in reality any effect to the value of a firm (may have to the price) because the structure of company’s assets does not change, and the total market capitalization should also stay the same. Stock split is different from new share issue but may be very similar if new shares to current shareholders are provided for free in a case of new issue.

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