Reasons for Stock Splits

••• Stock Market image by Paul Heasman from Fotolia.com

Companies choose to split stocks for a variety of reasons. Splitting a stock affects the number of shares of stock outstanding and its market price.

Identification

A stock split divides one share of stock into two or more shares. This instantly reduces the market price and par value to a price proportionate to the new number of shares.

Influence Market Price

As the market price per share of stock increases, the price may become too high for the average investor to purchase. If the company wants its stock to be available for the average investor, it may split the stock to reduce the market price.

Increase Stockholder Base

A stock split increases the number of shares trading on the market. With more shares available, there is the opportunity for more investors to purchase shares and become part of the stockholder base for that company.

Perception of Future Growth

The market perceives a company who engages in a stock split as a growing entity. Investors believe that if a company needs to split its stock, then it must have plans to continue growing into the future. This belief creates a positive image of the company in the market.

Reverse Stock Split

A reverse stock split is the opposite of a stock split. Instead of splitting one share of stock into several, it consolidates several shares into one. The market price and par value instantly increase. Companies do a reverse stock split for opposite reasons than those for which companies choose to do stock splits.