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Stock Split
Splitting Stocks
What is a Stock Split?
A stock split increases the number of shares, whilst the price is adjusted such that the before and after market capitalization remains the same and dilution does not occur.
What?
For example, if your blog has 5,000 shares at $50 then your market capitalization is (5,000 x $50), B$250,000. If you split your stock 2:1, you will have 10,000 shares at $25. The market capitalization remains the same at (10,000 x $25), B$250,000.
Reverse Splitting Stocks
What is a Reverse Stock Split?
A reverse stock split causes a reduction in number of shares and an accompanying increase in the share price. There is a stigma attached to doing this so it is not initiated without very good reason. Many institutional investors and mutual funds have rules against purchasing a stock whose price is below some minimum, perhaps $5. An extreme case would be when a share price has dropped so low that it is in danger of being delisted from the stock exchange.
It is also possible that a reverse stock split could be used as a tactic to reduce the number of shareholders. In a hypothetical 1-for-100 reverse split any investor holding less than 100 shares would simply receive a cash payment and no shares of stock.
So in real terms?
If your blog has 10,000 shares at $25 then your market capitalization is (10,000 x $25), B$250,000. If you reverse split your stock 1:2, you will have 5,000 shares at $50. The market capitalization remains the same at (5,000 x $50), B$250,000.