Stock market 101: What is a stock split?

Julie Brownlee, Fsp Invest, 15 Sep. 2014

Tags: stock split, what is a stock split, stock splits, how a stock split works, stock market basics, shares,

Once you get to grips with buying and selling shares on the stock market, there are a number of other things you might come across as a shareholder.

One of these is a stock split.

So what is a stock split? And why do companies split their stocks?

Let’s take a closer look…

Why a company would do a stock split

When a company first lists on a stock exchange, like the Johannesburg Stock Exchange, it may have a low share price. This could just be a few cents.

But over the years as the company grows, the share price could rise to R500, R1,000 or more.

As a shareholder this is what you want to see – the shares you buy becoming more valuable.

However, when a share price becomes very high, it makes it more difficult for small investors to buy a decent quantity of shares.

For example, if a share is trading at R1,000 and you wanted to buy 100 shares, it would cost you R100,000!

Paying so much for quite a small amount of shares can put some small investors off investing in that company.

When a share price becomes very high, it can make them harder to buy and sell. And can result in the liquidity of a share falling.

This is where a stock split comes in

To get around this problem of a high share price, a company can split its existing shares into smaller ones by way of a stock split.

For example, Company ABC has 1 billion shares. They are trading at R1,000 each. It could do a 10 for 1 stock split.

This means Company ABC would end up having 10 billion shares priced at R100 each.

Shareholders in Company ABC would now have ten shares for each one share they held before the stock split.

When share prices are high and companies embark on a stock split, it can actually help their share price rise as they become more marketable.

So there you have it, what a stock split is.

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