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I was recently thumbing through my USA TODAY app on my iPad and came across a great article called "Investors Seem to Love stock Splits, But Do They Matter?” Many companies that do a stock split do so to attract investors to their company, and many investors love the idea of having more shares without having to invest additional money.
In a stock split, a company increases its number of issued shares by a certain multiple, such as 2 or 5, or whatever they want, and distribute that stock back to the shareholders themselves. If they do a “2 for 1 Split” the owner of each share of stock will get another one, at no cost. If you own 1,000 shares, you’ll get another 1,000 shares. Before this can take place,however, it must be voted on by the Shareholders and approved by the Board of Directors.
Usually, at the same time, the price of the stock will be half of what is was the day before, so the shareholders don't actually get a real gain, just more stock, though it is worth less money. "The total value of the company stays the same, but the company is sliced into a greater number of pieces. This means that from a valuation standpoint, a stock split is meaningless," says Matt Krantz of USA TODAY.
So why do companies split their stock? There are some benefits to a stock split including attracting new investors, who may not want to get into an expensive stock, when they can afford less than 100 shares. but will buy 100 shares of a stock they can afford.
Why do many individual investors love stock splits so much? For current shareholders they like owning twice as much of the stock, even if it’s not a financial advantage, initially. They perceive that it will become more valuable as time goes on.
Although the concept is fairly simple, the paperwork involved can be daunting. It is best done after consulting with your corporate attorney. There are many sources to learn more about stock splits, if you are interested.
The first thing to know before you consider a stock split is how many shares your company has Authorized, so you’ll be sure to have enough shares authorized to make the split. To check on the number of Authorized shares your Delaware Company has, just give us a call or an email – we’ll look you up on the State of Delaware’s Corporate Data Base and let you know.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.