What is a Stock Split?

A stock split happens when a company releases additional shares of stock by splitting the existing ones without diluting its stakes' value. This strategy lowers the value of each share individually while increasing the number of outstanding shares. The company's overall market capitalization and the value of each shareholder's stake stay the same while the number of outstanding shares changes. 

Why Do Companies Use This Strategy? 

Companies may aim to make the price of stocks more accessible and attractive to investors to issue more shares. Splitting stocks means more availability, which creates a platform for the small investor. To put it simply, if a stock is offered to the public at an affordable cost, more investors will be able to invest in that stock. This activity will create more liquidity for the company. Without losing any profit, they would still be sharing the same amount in total with the same cost. 

Another purpose of a stock split is to increase interest in the firm and the stock. The cheaper stock in terms of price is more preferred. With the splitting of stocks, the number of shares also increases. The point of splitting stocks is all about capital, as companies aim to meet their capital needs. 

First Stock Splits of Major Companies 

· Amazon Stock Split: In 1999, Amazon (AMZN) announced its first-ever stock split, a corporate action that resulted in an increase in the number of outstanding shares. 

· Tesla Stock Split: In August 2020, Tesla initiated its first stock split, witnessing an 81% increase in shares between the split announcement and the actual split day. 

· Google Stock Split: On April 03, 2014, Google underwent a 1998-for-1000 stock split, resulting in shareholders owning 1998 shares for every 1000 shares they held pre-split. 

· Apple Stock Split: Apple has split its stock multiple times since going public in December 1980. The first split was a two-for-one on June 16, 1987, with a pre-split price of $79. 

What About Reverse Stock Split? 

Reverse stock splits, unlike regular splits, leave stockholders with fewer shares, and they frequently occur when a stock has lost a significant amount of value. Reverse stock splits work the same way as conventional ones but in the opposite direction. A reverse split substitutes many shares held by investors with fewer shares. The new share price is higher in proportion, but the company's total market value remains unchanged. 

A reverse split is neither beneficial nor adverse in and of itself. It is just a change in a company's stock structure that has no bearing on its operations. A reverse split is taken as a sign of crisis by the market and often is not used for a positive reason. 

The Bottom Line 

As a result of stock splits, it was concluded that most stocks performed better after the split. This is because stocks reach a saturation level after a specific price. Another reason the stocks perform better after the split is that the supply-demand balance changes when the stock whose price has decreased in terms of purchasing power due to the split increases. In terms of purchasing power, an increase in the volume of the stock whose price has decreased can be seen, which may positively affect the stock's performance.