What is stock split?

July 2, 2012

Learn about stock splits and how they are different from stock dividends, view examples of stock splits and understand accounting for stock splits.

1. Definition of stock splits

Stock split is the issuance of additional shares to shareholders in accordance with their ownership percentage that results in the reduction in a par (or stated) value per share.

Stock split is similar to stock dividend in that in both cases:

  • Company issues additional shares to its shareholders according to their percentage ownership
  • Total shareholders’ equity doesn’t change

However, a stock split has an effect on the par value per share while a stock dividend affects the total par value (of common stock). The major differences and similarities between stock splits and stock dividends are summarized in the table below. To learn more about stock dividends, refer to the article on Differences between Cash Dividends and Stock Dividends.

 

Stock Dividend

Stock Split

Total shares outstanding

Increase

Total stockholder’s equity

No effect

Total retained earnings

Decrease

No effect

Total paid-in capital

Increase

Total par value (common stock)

Increase

Par value per share

No effect

Decrease

As we can see from the table above, a stock split increases the total shares outstanding and decreases the par value per share. Because the number of total shares increases in the same proportion that the par (or stated) value per share decreases, the total par value of common stock does not change.

Why a company might split its stock?

Usually companies split their stock when they think that their share price is too expensive or when similar companies are trading far below their stock.

The goals of a stock split are to:

  • lower the market value of the stock and appeal to more investors
  • increase stock marketability and make stock easier to trade

In general, stock market value decreases proportionally to the size of the split. Following the split, nevertheless, the stock price often times increases.

As an example of a stock split, in June 2012 Tronox company, a producer of titanium-bearing mineral sands and pigments, announced a 5-for-1 split of its stock trading at about $125.  That means that Tronox shareholders will receive four (4) additional shares for each share they own.

According to Dowjones Newswires, the following stock splits are to occur in summer-fall 2012 (non-exhaustive list):

  • AMETEK: 3-for-2
  • Brown-Forman: 3-for-2
  • CME Group: 5-for-1
  • Coca-Cola: 2-for-1
  • Google: 2-for-1
  • Raven Industries: 2-for-1
  • Toro: 2-for-1
  • Under Armour: 2-for-1

Stock splits are quite common. Sometimes stock splits can be somewhat unusual. For example, Google stock split (approved by shareholders in June 2012) will create a new class of non-voting stock: a share of Class C stock will be given for every share of the existing Class A stock.

Companies can also execute reverse stock splits to boost their stock price or to regain compliance with stock exchange listing requirements. In a reverse stock split, the par value per share increases while the total number of shares outstanding decreases.

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