What is a Stock Split?
A stock split is a corporate action where a company divides its existing shares into multiple shares. The overall value of the company remains the same, but the number of shares increases, and the price per share decreases proportionally. Stock splits are often implemented to make shares more affordable to a broader range of investors, as a lower price per share can attract more interest. Additionally, they can increase liquidity in the market and may signal to investors that the company’s management is confident about its future prospects.
Key Features of Stock Split:
- Accessibility and Affordability: Stock splits decrease the price per share, making the stock more affordable to a wider range of investors.
- Liquidity Enhancement: By increasing the number of shares outstanding, stock splits can enhance liquidity in the company’s stock.
- Psychological Impact and Signal of Confidence: Stock splits often have a positive psychological impact on investors, signaling confidence in the company’s growth prospects.
Difference between Stock Split and Reverse Stock Split
The basic differences between a stock split and a reverse stock split lie in their direction and effect on share quantity and price. A stock split increases the number of outstanding shares while decreasing the price per share, achieved by dividing existing shares into multiples. Conversely, a reverse stock split decreases the number of outstanding shares by consolidating multiple shares into one, resulting in a proportionally higher price per share.
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