Stock split is dividing the number of shares into more shares with a lower nominal value. Corporations do this to make stocks more affordable. A 2-for-1 split yield doubles the number of shares outstanding and the stock price drops by half. The company’s value is not affected.
Consequences of stock split
Like stock dividends, a stock split results in an increase in the number of shares outstanding. Another result is the decline in stock prices.
In a 2-for-1 split, each shareholder will receive an additional one share for each share previously held. After the split, shareholders who own 1,000 shares will become 2,000 shares.
Likewise, after a 3-for-2 stock split, shareholders will see an increase in their share ownership of 1,000 shares to 1,500 shares.
Assume the share price of the company is Rp200. The total nominal value of shareholder ownership is Rp200,000 (Rp200 x 1,000). After a 2-for-1 split, shareholders will own 2,000 shares with a nominal value of Rp100. The total nominal value remains Rp200,000.
Companies choose to split their shares so that the price of stock trading falls to a range that is considered comfortable by most investors. Because the price per share is lower, it stimulates investor purchases. That way, stock liquidity increases.
Even if investors don’t make a lot of money right away (such from dividend), investors get more capital gain when stock prices rise in the future. Say, from the previous case, the stock price appreciated from Rp100 to Rp150 in line with the company’s positive profitability performance. Because after a 2-for-1 split the investor holds 2,000 shares, the total face value increases from Rp200,000 (Rp100 x 2,000) to Rp300,000 (Rp150 x 2,000).