Stock Split

A stock split is a proportional increase of the number of shares outstanding that do not affect the assets and profits of the issuing company. A stock split is similar to a dividend stock in that it also produces an increase in the number of shares, issued in a proportional form, while the assets, liabilities, equity, and earnings are kept the same. The only existing difference between a stock split and a stock dividend is of technical matters. From accounting’s point of view a stock dividend over 25% is recorded as a stock split.

A stock dividend at 100% is similar to a two-for-one stock split. A company could separate its stock due to high price, and with a lower price the company’s stock turns more negotiable. The following example illustrates what happens when a company declares a two-for-one stock split. If at the time of split the company has one million shares outstanding and the price of stock is $50 per share, after the split the company will have two million shares outstanding, and stock will be negotiated at $25 per share.

Someone who owns 100 shares before the split (with a value of $50 per share) would be, then, after the split owner of 200 shares approximately valued in $25 per share. In January 2003, Microsoft Corporation announced a two-for-one stock split that was effective on February 18, 2003. Before the split Microsoft had closed at $48.30 per share. The next morning the split opened at $24.15 per share. An investor with 100 shares before the split would own 200 shares after the split.

Occasionally, companies announce a reverse split which reduces the number of shares outstanding that do not affect the assets and earnings of a company. When the price of stocks of a company drop, a reverse split increases its price at a reasonable level.

Another reason to why the price of shares increase, is that of complying with the minimum listing requirements of the exchanges and the NASDAQ market. For example, a stock being negotiated at a $1 range would be negotiated at $10 using a reverse split of one-for-ten. The number of shares outstanding would be reduced 10 times after the split. In November 19, 2002, AT&T had a reverse split of one-for five shares.