Stock Splits
Companies use stock splits to adjust the price of a stock without really changing the real value of the stockholders’ holdings in the company. The majority of companies have stocks that trade in the $5 to $60 range. When the price of a stockrises over about $80, and especially whe the price of a stock gets over $100, it begins to look pricey to investors who cannot afford to buy the stock in 100-block units. Stocks may be bought and sold in almost any quantity, but 100-share (and larger) blocks are something of a traditional benchmark for stock trades. Stock splits give a company a way to manage the share price when the price gets too high or too low, without affecting the stock’s underlying value.
Here’s how the typical stock split works. First, a company will announce the date they plan to do the stock split and the date on which you must own the stock to be eligible for the stock split. The typical stock split works on a simple ratio. A “2-for-1 split” is the most common, and it means that for every share of stock you own, you’ll receive one new share of stock. Likewise a 3-for-1 split means that for every share of stock you own in the company, you’ll end up with three after the split (the one share you had, plus the 2 new ones). An easy way to think of it is turning in your “old” shares of company stock and receiving the stated ratio back in ”new” shares.
Once the new shares are issued in a stock split, almost like magic, the price of the stock adjusts on the market to reflect the split, since more shares of the company’s stock now exist.
Stock splits can work in reverse as well in something called a “reverse split.” This typically happens when a company’s stock falls below $1. The company takes in many shares, returning fewer shares to the investor after the split. This is done in an effort to raise the per-share price. Reverse splits are generally seen as a sign of trouble, and many investors will bail out of a company’s stock when a reverse split is announced.
Examples:
In a 3-for-1 stock split, one share owned becomes three shares after the split. So 1,000 shares will become 3,00 shares after the split.
In a 3-for-2 stock split, two shares owned become three shares after the split. So 80 shares will become 120 shares after the split.
In a 2-for-1 stock split, one share owned becomes two shares after the split. So 44 shares will become 88 after the split.
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Directions: For each situation described, find the number of shares held after the specified split has taken place. One question asks you to solve a stock split ratio.
1. The Fantastic Discoveries Mineral Rights and Patents Company has announced a 3-for-2 stock split. The CEO of the company owns 1,200,000 shares. How many shares wil the CEO have after the split takes place?
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2. The Oil, Electric, and Gas Profit Corporation of Western Oregon has announced a 3-for-1 stock split. Carmen owns 75 shares in this company. How many shares will she have after the split takes place?
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3. Goliath Oak Tree Land Management and Timber Trust Company has suffered some setbacks in its business operations. Its company stock price has hovered at around $1 per share for several months. The company has 200,000 outstanding shares. After a 1-for-10 reverse split takes place, how many outstanding shares will there be in this company?
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4. Reynard works for a fashion company with publicly traded stock. He heard a rumor at a fashion show that a competitor will be announcing a 3-for-1 stock split soon, and the stock price is expected to rise on that news. He does not want to be disloyal to his own company, but the stock split sounds too tempting to miss. If Reynard purchases 2,000 shares of the competitor’s stock, how many shares will he have after the split?
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5. Smith, Lemming, and Associates Asbestos Chemical Cleanup Corporation announced a 1-for-10,000 stock split, hoping to pull the share price up from the current price of 2 cents per share. The chairman of the company hopes to settle all pending lawsuits and to eventually move the company into less risky areas. Owning 50,000 shares of this company’s stock, Owen hopes for a speedy recovery and a return to the company’s paying of dividends again. How many shares will Owen have after the reverse split has taken place?
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6. Jill has just received a notice, stating that her 60 shares of stock in the Glass, Fabric, and Faux Steel Design Decorating Company will become 240 shares after an announced stock split takes place. What is the ratio of this stock split?
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