What is a Stock Splits? Here is What You Should Know
Stock Splits is a feature that allows you to split your stock into two or more parts. This can be done by splitting the original shares of one company, or it could mean creating new companies from existing ones. The process for doing this varies depending on whether you are using an online broker like Interactive Brokers and TradeStation, or if you're working with paper trading software such as Quicken Pro. In either case, there's usually some paperwork involved in setting up a stock split.
If you want to learn how to do a stock split, then read on!
How To Split Stock Shares Online
If you have access to an online brokerage account, then all you need to do is log onto your account and click on "Split" under the "Accounts" tab at the top of the page. You'll see something similar to what's shown below:
You will also notice that there is a button labeled "Splitting".
Clicking on this will bring up another window where you can enter information about the splits you wish to make. For example, here we've entered 2 stocks and 3 different dates. Once you've filled out these fields, simply press submit and wait while the system does its thing.
Once everything has been processed, you should receive confirmation via email.
How To Do A Paper Trading Stock Splits
For those who prefer to work with paper trading programs, things aren't quite so simple. However, they still don't require much effort once you know exactly what needs to happen. Here's how to set up a stock split in Quicken Pro :
First off, open up your portfolio manager. Next, select the stock you'd like to split. Then go to the "Options/Trades" menu item and choose "Create New Company." Finally, fill in the details regarding which date you would like each share to trade on. When you're finished, just hit save and close the program. That's pretty much it - now when you look back over your trades, you'll find that each share was actually split into two separate shares.
What Are Some Of The Benefits Of Doing Stock Splits?
There are several benefits associated with performing stock splits.
1. It increases liquidity. By increasing the number of outstanding shares, it makes it easier for investors to buy and sell them.
2. It reduces volatility. Since fewer shares exist, less money changes hands during any given day. As a result, prices tend to move slower than before.
3. It may increase earnings per share. Shareholders get paid dividends based on their ownership percentage. So, if you own 10% of XYZ Corp., you'll earn $0.10 worth of dividend every year. But if you owned 100%, you'd only get half that amount. With a stock split, shareholders end up owning twice as many shares but only earning half as much because the company pays out half as much in dividends.
Are There Any Downsides To Performing Stock Splits?
Of course, there are always downsides to anything. And since stock splits involve changing the way a company operates, there are bound to be drawbacks. Let's take a quick look at three potential issues related to stock splits.
1. Increased Taxes
When you perform stock splits, you must pay taxes on both halves of the newly created shares. These additional tax payments come straight out of your pocket. Depending on your situation, this might not seem too bad. After all, you were already paying taxes on one-half of the original shares anyway! But keep in mind that by splitting your shares, you could potentially reduce the value of your investment. If you had bought 1 million shares of ABC Inc. and performed a 50/50 split, you'd now own 500,000 shares instead of 1 million. This means that you have more shares to lose if the price drops below some point. In other words, you risk losing part or even most of your initial investment.
Another downside is that after stock splits, the new shares usually become more volatile. Because the market tends to react slowly to news events, people often assume that the split was caused by an event such as a merger or acquisition. Consequently, they start selling shares right away. Unfortunately, these sales can cause the price to drop significantly. For example, let's say that you purchased 1000 shares of XYZ Corp. at $100 apiece. You then decide to do a 50/50 split. Now, you've got 2000 shares instead of 1000. At first glance, this seems great. Your total holdings are doubled while the price has dropped from $100 to $50. But remember: Shares are traded on volume. Volume will likely decrease dramatically once everyone realizes what happened. Suddenly, those 2,000 shares aren't going anywhere fast. They're sitting around waiting for someone else to make a bid. Eventually, the price starts climbing again. Once it does, you might want to consider buying back in.
If you hold onto your shares long enough, you might eventually receive a dividend check. However, when you buy into a company through a stock split, you don't automatically qualify for future dividends. Instead, you need to wait until the company actually decides to issue them. The good news is that companies rarely stop issuing dividends. Even so, you won't know whether or not you'll ever see another payment until you sell off your shares.
Frequently Asked Questions
Q: What happens to my existing shares?
A: When you perform a stock split, you create two separate classes of shares. One class represents the old shares and the other class represents the new ones. Each shareholder receives exactly the same number of each type of share. As far as the company itself goes, nothing changes. All operations continue just like before.
Q: How do I find out how many shares I currently own?
A: Most brokerage firms provide this information online.
Q: What is Stock Splits?
A: A stock split occurs whenever a company increases its outstanding shares without increasing their nominal value. It allows shareholders to increase their ownership interest with no change in cost.
Q: Why would anyone want to perform a stock split?
A: There are several reasons why companies may choose to conduct a stock split. Some common examples include:
1) To raise capital. Companies sometimes use a stock split to generate extra cash. By creating more shares, investors get paid proportionately less per share than they did previously.
2) To improve earnings. Sometimes a company wants to boost profits by reducing the amount of money required to purchase every share.
3) To avoid dilution. Diluting shareholders' stakes reduces the overall percentage owned by any individual investor. That makes it easier for management to acquire control over the business.
4) To prevent fraud. If a company issues too much stock, there could be problems if some insiders try to manipulate the market. In order to reduce the risk of manipulation, a company may limit the number of shares available to the public.
5) To attract buyers. Investors who have been holding shares for awhile tend to think that the company is undervalued. So, they begin dumping their shares. This causes the price to fall. Afterward, the company performs a reverse stock split.
So What Should I Do?
The bottom line here is that performing stock splits isn't necessarily a bad thing. On the contrary, it can help boost shareholder returns. As with any decision though, you should weigh the pros and cons before making a final call.
In general, the best strategy is to avoid doing a split unless absolutely necessary. That said, sometimes circumstances dictate otherwise. When faced with a choice between two equally attractive options, choose the option that offers better growth prospects. I would suggest against it because there is no guarantee that the share count will be increased. It may just go down. Also, the number of shares outstanding changes which makes the calculation different than normal.