What is a stock split?
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A stock split is a corporate action in which a company increases the number of its outstanding shares by issuing more shares to its current shareholders.
In a stock split, the number of outstanding shares increases and the price per share decreases proportionally.
However, the market capitalization and the value of the company do not change.
The two most common split ratios are 2-for-1 and 3-for-1, respectively, meaning that a stockholder will receive two or three shares for each share they previously owned.
Why Do Companies Split Their Shares?
A stock split is frequently implemented by public corporations once the share price has increased significantly. Their stock will look more appealing from a per-share price perspective and attract investors if the trading price is decreased into a more acceptable range.
Additionally, companies frequently split their stock to increase liquidity. The liquidity increases with the number of outstanding shares, facilitating trading and reducing the bid-and-ask spread. By increasing the liquidity, investors buy and sell stocks more easily and with less of a negative impact on the share price.
Furthermore, it can help companies buy back their own stock at a lower price since their orders would not push up the share price of a more liquid stock as much.
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