What is a stock split?
A stock split is when a company increase in the number of shares by issuing additional shares after the board of director’s ruling. If a company announces a 4-for-1 stock split, the company will give existing shareholders two additional shares for every initial share that they had. If a company had 10 million shares outstanding before the split, it will have 40 million shares outstanding after a 4-for-1 split. The price of the original share will be divided respectively. This is to allow the company’s shares to be more affordable to smaller investors and increase liquidity in the stock due to the increased number of participants. For example, the shares were worth $100 before the splitting, they would trade at $25 after the split. Hence as the number of outstanding shares increases, the price decreases but the company’s market value remains constant.
So, when a large company announces a stock split, that means the share price will be split making it affordable for average investors to participate in the buying/selling that specific stock that was once expensive to them to buy.
Is the company affected?
The company is not entirely affected because the company’s market value remains the same. The main beneficiaries are the new wave of investors who can participate in the buying and selling of the stock post the stock split. This will subsequently improve the liquidity of the stock because it will be traded much more than when only a limited number of trades were able to trade.
Stock Splits provide companies with more flexibility in how to manage equity through this strategy.
What is a stock buyback?
A share buyback, also known as share repurchase, is a corporate action to buy back its own outstanding shares from existing shareholders, usually at a premium to the prevailing market price. It can be used as an alternative tax-efficient way to return money to shareholders.
There are three main reasons why a company will buyback shares:
• Help companies consolidate ownership.
• When there is market pessimism, companies use buybacks to increase equity value.
• Make companies look more financially healthy, attracting more investors.