There are several reasons why companies split their stocks. Read on to find out about the often employed strategy.
A stock split essentially divides every share into multiple shares. This is usually done to create lower-value shares that are more liquid and affordable.
Note, though, that when a stock split occurs, the number of outstanding shares rises. However, the company’s value as a whole goes unchanged. For investors, this means more shares at a reduced individual price, but a net investment value that remains the same.
To illustrate, perhaps a company with 5 million outstanding shares intends to do a two-for-one stock split. That means it would have 10 million shares post-split. And as a result of the split, the company’s stock price would drop by half.
There are a variety of reasons why companies would pursue a stock split. One common reason is to offset what they perceive to be a stock price that’s too high, relative to competitors or similar companies. The share’s increased liquidity due to the reduced price gives buyers and sellers increased flexibility. It also means that even high future trading volumes may not significantly affect the stock’s price.
Here is a recent high-profile stock split:
Alphabet (GOOG) announced a 20-for-one stock split, its first in eight years, effective on July 15, 2022.
Other Historical Stock Splits
Such a ratio expresses the number of new shares that will be created following a forward split. Note that as long as the action is sanctioned by the company’s board and shareholders, a company may perform a stock split of any ratio, with 3:1 or 2:1 being the most common.
A stock split has no impact on the value of one’s investment overall. Still, it may indirectly affect stock movement. For example, more people buying the stock due to its new affordability could drive up demand, which could cause an even higher stock price increase.
A stock split does not – by itself — impact a company’s overall market capitalization. Instead, it is merely a modification of a company’s stock share count. Still, the circumstances regarding the stock split can affect stock movement.
What is key to understand is that the proportional ownership of an investor’s position is not affected by the split.
One should note that it is the market that will decide a stock split’s impact on a position’s total value. The split alone does not change investment value one way or the other.
The terms traditional stock split and forward stock split are interchangeable. The opposite of a forward stock split is a reverse stock split. With the latter, the aim is to shrink its number of outstanding shares and raise share price proportionately. The company’s market value stays the same with a reverse stock split as well.
A company might do a reverse split if its share price drops to the point at which it risks an exchange delisting it. That can occur if a stock is not meeting the minimum price a listing requires.
A company’s value is not directly affected by a stock split because the company’s fundamentals or growth potential were not changed as a result of the action.
If investors focused more on diversifying their portfolio, they would not have to constantly respond as much to the ups and downs of the stock market. Financial managers and seasoned investors increasingly agree that it is likely wiser to include alternative investments such as art and real estate in holdings, as they can provide consistent secondary income and guard against inflation.
Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially exceptional gains these investments presented were also limited to these groups.
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Learn more about the ways Yieldstreet can help diversify and grow portfolios.
Ultimately, investors need not await a stock split to buy shares. Options also include assets that are outside the stocks and bonds class altogether. Rather than have a portfolio that is wholly dependent on ever-changing public markets, a better move may be to commingle it with secondary income-generating alternative investments.
All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.