This week, Google announced that it will “split” its shares, which caused a rally in its value of 7 percent. This type of announcement is usually positive for the company since it decreases the price per share and enlarges the investing public by allowing small investors to buy shares of the same.
A stock split is a division of the securities of a publicly traded company. It consists of dividing the nominal value of the shares, increasing the number of titles proportionally but maintaining the same capital.
Its effect is neutral for the shareholder and the value of the company since the earnings per share or dividends are also reduced in the proportion of five times. This type of measure is usually carried out to increase the number of shares in circulation and, in parallel, decrease the value of each share.
If a stock is worth $2,853, as in the case of Google, a retail investor must put up a large proportion of their portfolio to buy a single share.
That is, not everyone has the ability to buy Google shares at that price. Therefore, if the price of the same decreases, the retail investor will find that action more accessible to be incorporated into the portfolio and thus the potential investor public in said company is enlarged.
Google plans to execute a split at the rate of 20 new shares for each current title. Its investors will receive, if the measure is approved, 19 new titles for each one of the current ones.
Does not affect the shareholder
The split does not affect the value of the company or the shares. With this measure, the number of shares in circulation is increased, but their price is decreased, respecting the monetary ratio of all investors.
If an investor has a share and the company decides to do a split, say, 2 to 1, each investor would get twice as many shares, but at half the price. At the end of the day, he would have the same amount of money.
A recent case was the Apple stock split carried out in August 2020. At that time, the tech giant split its shares 4-for-1, which means that each stock was divided into 4 shares. from being worth $499.23 per share to just $124.81.
This was welcomed by investors and the stock also rose strongly on the news. In turn, this allowed more investors to buy Apple shares.
If, for example, a retail investor with $1,000 in his portfolio wanted to buy Apple, before the split he had to place half of his portfolio, so perhaps he did not see it convenient to do so since it made it difficult to diversify his portfolio.
On the other hand, once the split was applied, if he wanted to buy an Apple share, it would represent 12.5% of his portfolio, finding a more logical proportion so as not to affect the diversification of his portfolio and a more accessible value for buy the same.
Another recent known case was Tesla, which also announced a 5-to-1 stock split in August 2020. The company led by Elon Musk had reached over $1,600 in 2020 and, given a high face value, it was decided to carry out the split. split. At the time, Tesla shares reacted with a 6% gain in the off-hours after the split announcement.
Reference-www.eleconomista.com.mx