Before reading this post, if you aren’t familiar with the stock market check-out my beginner’s guide to investing in the stock market:
https://www.theweeklyblog.com/post/beginners-guide-to-investing-in-the-stock-market
Stock Splits
A company will take the outstanding common shares a decrease their cost in order to increase the amount of shares available for sale.
For example, Company A has 100,000 outstanding common shares being sold for $150 per share. They declare a 2-1 stock split. New shares outstanding = 200,000 shares and the new price per share = $75 per share.
Why would a company impose a stock split?
Often done when the company’s performance in the stock market grows exponentially.
Set in place to keep the price of the company’s shares in a certain price range.
The stock has become less affordable to the average investor.
Increases liquidity.
The stock usually does well after the stock split is imposed.
Reverse Stock Splits
A reverse stock split is basically the opposite of a stock split. It allows a company whose shares have decreased in price to restore the price upwards towards the preferred range.
For example, Company A has 100,000 outstanding common shares being sold for $150 per share. They declare a 3-4 reverse stock split. New shares outstanding = 75,000 shares and the new price per share = $200 per share.
Why would a company impose a reverse stock split?
The only reason why a company would be imposing this is because the company hasn’t been performing well in the market.
Not good if you invest for the dividends, since companies hardly pay a dividend if the stock price is falling.
If you have any other terminologies that you would like to know of feel free to leave it in the comments below and I will cover it next week!
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