Stock splits in chapter 11(equity)

Suppose you currently have 100 shares in a company. They have a nominal value of $1 per share and a market value on the stock exchange of $8 per share. So the total MV of your shares in $800.

Suppose the company now announces a stock split and they cancel each $1 shares and replace them with two shares with a nominal value of $0.50 each. So you now have 200 shares with a nominal value of $0.50 (instead of 100 shares with a nominal value of $1 each). At the same time, the market value of the shares will halve and so you will now have 200 shares with a MV of $4 each (instead of 100 shares with a nominal value of $8 each).

So the stock split ends up making no difference to anybody – you end up with the total market value of your shareholding staying the same. The company ends up with the same total nominal value of the shares they have in issue.

The reason companies sometimes do this is that it makes the shares easier to buy and sell on the stock exchange – people tend not to like dealing in shares when the price per share gets very high, they prefer it when the price per share is lower.

I don’t understand the figures you have typed 🙂

The total market capitalisation does not change. If it is a 2 for 1 stock split then there end up being twice as many shares but each share has a market value of half of what the original shares had.

So it ends up making no difference in total to either the company or to the shareholders. The only benefit is that because the market value per share is lower, the shares become more easily tradeable on the stock exchange.

You are welcome 🙂