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  • sherryazure sherryazure Feb 2, 2011 9:33 PM Flag

    Split ?

    For example, suppose XYZ Corp. has set aside $2.5 million plans to pay out a $2.50 dividend on December 8 to all of its shareholders on record as of December 1 where there are one million shares outstanding. Furthermore, the stock is planning to have a two-for-one stock split on December 6. Since the split happens five days after the record date, all those newly created shares will not be eligible for the dividend on December 8.

    As for situations when the stock split occurs before a dividend record date, the dividend will for the most part be paid out for the newly created shares as well. Except that the dividend likely will be split compared to previous time periods. This is due to the fact that companies want to maintain the amount of dividends issued. For example, suppose that ABC Corp has originally set aside $2.5 million plans to pay out its quarterly $2.50 dividend on December 8 to all of its shareholders on record as of December 1 that own the one million shares outstanding. Since the board of directors authorized a stock split on November 31, the company will be taking the $2.5 million and then issuing a $1.25 dividend to the holders of its two million shares outstanding.

    Typically, to avoid complication, a company will not have a dividends issue and a stock split around the same time. Effectively though, in situations where a dividend and a split occur, the shareholders who hold throughout this period will be paid the same amount in total dividends whether there was a split or no

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    • What Does Stock Split Mean?

      A corporate action in which a company's existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split.

      nvestopedia explains Stock Split
      For example, in a 2-for-1 split, each stockholder receives an additional share for each share he or she holds.

      One reason as to why stock splits are performed is that a company's share price has grown so high that to many investors, the shares are too expensive to buy in round lots.

      For example, if a XYZ Corp.'s shares were worth $1,000 each, investors would need to purchase $100,000 in order to own 100 shares. If each share was worth $10, investors would only need to pay $1,000 to own 100 shares.

      While a stock's value is not found in its price, companies know that the price is a major psychological indicator of value. A stock split is designed to give the impression that a stock is more affordable by allowing investors to buy more shares for less money.

      • 1 Reply to sherryazure
      • Definition
        1. A stock split is simply one share of stock being split into more shares. The size of the split is set by the company and represented with a ratio. A 1:2 stock split means that 1 share is split in to two shares. A 1:10 split means that 1 share is split in to 10.
        No Change in Value
        2. If a stock split takes place, the investor who held shares prior to the split does not lose or gain money. Just as a $10 bill can be split in to two $5 bills without any gain or loss in value, a stock can do the same.
        Why Split
        3. Companies know that smaller investors want to pay less to get more shares, so by pricing their stock at an affordable level, it allows the individual investor to buy more shares without actually getting more.
        Shares Available
        4. When a stock split takes place, the amount of shares that are for sale to the public increases. When a 1:2 stock split takes place, the amount of shares being offered to the public doubles.
        Reverse Split
        5. A stock that is only a few dollars per share risks being seen as a penny stock (speculative securities of very small companies priced below $5), by the public. To combat that, a reverse stock split may take place where a company will make multiple shares in to one share. For example, a 2:1 reverse split is when 2 shares are made in to one. The price of the share doubles and the amount of shares available to the public is reduced by 50%.

        Read more: What Does Stock Split Mean? |

        Answer: A stock split is essentially when a company increases the number of shares. For example, if you owned 25 shares of XYZ at $15 per share, and there was a 2-1 stock split, you would then own 50 shares worth $7.50 each. Why do companies issue splits if you still have the same amount of money?

        Liquidity. Some companies believe that their stock should be inexpensive so more people can buy it. This creates a condition where more of the company's stock is bought and sold (this is called "increased liquidity"). The problem, in theory, is that the increased activity will also leads to bigger gains and drops in the stock, making it more volatile.

        Many investors believe splits are a good thing. (Their thinking goes "Well, if the stock was at $15, and now it's at $7.50, it has to go back up to where it was!) This is wrong. The stock is where it was... remember that each share now represents half of the equity in the company that it did before the split. That means that each share is entitled to half the dividend, half the earnings, and half of the assets that it once was.

        A few corporations have been famous for their no-split policies. The Washington Post has traded well into the $600 per share range, and Berkshire Hathaway, which was at $8 a share in the 1960's, has traded as high as $150,000. This has created the welcome condition of a stable shareholder base.

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