Complete Guide To Corporate Finance

AAA

Dividends - Stock Dividends And Stock Splits

Like cash dividends, stock dividends and stock splits also have effects on a company's stock price. Stock Dividends
Stock dividends are similar to cash dividends; however, instead of cash, a company pays out stock. As a result, a company's shares outstanding will increase, and the company's stock price will decrease. For example, suppose Newco decides to issue a 10% stock dividend. Each current stockholder will thus have 10% more shares after the dividend is issued.


Stock Splits
Stock splits occur when a company perceives that its stock price may be too high. 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). Companies tend to want to keep their stock price within an optimal trading range.

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.



Stock Split Example:
Suppose Newco's stock reaches $60 per share. The company's management believes this is too high and that some investors may not invest in the company as a result of the initial price required to buy the stock. As such, the company decides to split the stock to make the entry point of the shares more accessible.

For simplicity, suppose Newco initiates a 2-for-1 stock split. For each share they own, all holders of Newco stock will receive two Newco shares priced at $30 each, and the company's shares outstanding will double. Keep in mind that the company's overall equity value remains the same. Say there are one million shares outstanding and the company's initial equity value is $60 million ($60 per share x 1 million shares outstanding). The equity value after the split is still $60 million ($30 per share x 2 million shares outstanding).

While stock prices will most likely rise after a split or dividend (remember price increases are caused by positive signals a company generates with respect to future earnings), if positive news does not follow, the company's stock price will generally fall back to its original level. Some investors think that stock splits and stock dividends are unnecessary and do little more than create more stocks. (For further reading on stock splits, see
Berkshire's Stock Splits: Good Buy or Goodbye? and Top Stock Target Price Misfires.)

Introduction To Raising Capital


Related Articles
  1. Investing Basics

    What Are Corporate Actions?

    Corporate actions are processes that change a company’s stock. Here are a few examples.
  2. Investing Basics

    Stock Splits: A Closer Look At Its Effects

    Most trades, including short sales and options, aren't materially affected by a stock split. Still, it's important for shareholders to understand how these events impact various aspects of investing. ...
  3. Bonds & Fixed Income

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  4. Investing Basics

    If You Had Invested Right After Amazon's IPO

    Find out how much you would have made if you had invested $1,000 during Amazon's IPO, including how the power of the stock split affects investment growth.
  5. Fundamental Analysis

    Do Stock Splits Cause Volatility?

    Since stock splits decrease the stock price, do they also increase volatility because shares are traded in smaller increments? Investopedia examines assumptions about this increasingly common ...
  6. Investing

    Understanding Stock Splits

    Find out how stock splits work and how they affect investors.
  7. Trading Strategies

    If You Had Invested Right After Apple's IPO

    Learn about how much a $1,000 investment in shares of Apple Incorporated would be worth if you invested at its initial public offering price.
  8. Stock Analysis

    If You Had Invested Right After JPMorgan's IPO (JPM)

    Find out how much your investment would be worth in 2016 if you had purchased 100 shares during JPMorgan's IPO, including the impact of dividends and splits.
  9. Stock Analysis

    If You Had Invested in Walmart Right After Its IPO (WMT)

    Discover the value of your shares in 2015 if you had purchased 100 shares of Wal-Mart Stores, Inc. at its initial public offering (IPO) price.
  10. Investing Basics

    What are Issued Shares?

    Issued shares are the amount of authorized stocks a company’s shareholders buy and own. The annual report shows the number of outstanding shares.
RELATED TERMS
  1. Split Adjusted

    A modification made to a security's price that takes into consideration ...
  2. Reverse/Forward Stock Split

    A stock split strategy that includes the use of a reverse stock ...
  3. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  4. Split-Up

    A corporate action in which a single company splits into two ...
  5. Push Out

    One of two ways to effect a stock split. In a push out, new share ...
  6. Fractional Share

    A share of equity that is less than one full share. Fractional ...
RELATED FAQS
  1. What is a stock split? Why do stocks split?

    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Answer >>
  2. How and why does a stock split?

    Learn why stock splits do not occur very often for individual stocks, and understand the impact of reverse stock splits on ... Read Answer >>
  3. What happens to the value of a mutual fund when a stock splits?

    Find out what happens to the value of a mutual fund when a stock in its portfolio splits, including how stock splits work ... Read Answer >>
  4. What are reverse stock splits?

    A reverse stock split is a corporate action in which a company reduces the number of shares it has outstanding by a set multiple. ... Read Answer >>
  5. How does a company decide when it is going to split its stock?

    Learn why some companies decide to split their shares, and understand how they think it helps the stock's liquidity and future ... Read Answer >>
  6. How does a stock split affect cash dividends?

    When a company decides to issue a stock split (or stock dividend), a couple of possibilities could occur concerning what ... Read Answer >>
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center