Possible Reasons for Stock Splitting

by Steven Walker 4 months ago in stocks

As an investor, you need to understand all there is to know about stock dilution.

Possible Reasons for Stock Splitting

As an investor, you need to understand all there is to know about stock dilution. Stock splitting is one of the most common ways in which the shares of a company are diluted. When the board of directors of a publicly traded company decides to issue new stock to existing shareholders and lower the value of current stocks, it is called a split. Instead of buying research papers, companies often decide to split their stock for one of the following reasons.

Competition

Many companies prefer to keep their stocks valued at a similar level to the competition. This provides incentive for small investors to jump ship from a competing company and change loyalty. If the shares of a company cost twice as much as a competing company, a small investor is less likely to buy stock in the more expensive company. Many companies in this position decide to split their stocks.

Demand

Publicly traded companies prefer to be in the news. Publicity makes the companies receive more action from traders. Many companies decide to issue splits to get in the news and attract more trading action. This decision carries many risks as stock prices often fall sharply after a split due to a lack of confidence from investors. Still, it does give the company much-needed publicity, so many companies choose this method.

Liquidity

Small traders look for easy liquidity in their stocks. These traders want stocks that are easy to buy and sell. In the stock market, more expensive stocks are difficult for small investors to purchase. Companies with high valued stocks often enact a split even if they are at a similar value to their competition. This split makes the companies a more attractive investment for small-time investors.

Delist

When a stock drops below a certain value, the governing authorities of the market often delist it. To prevent this, publicly traded companies perform a rare type of split known as a reverse split. A reverse split works like a regular split, except the company regroups shares already owned by investors instead of splitting the stock. This raises the value of shares to keep the company listed on the stock market.

All of the possible reasons for stock splitting make it hard to tell whether it is good or bad at first glance. If a company that you have stocks in splits, you own more shares although your shares are worth less. Understand the possible reasons, and decide whether you want to remain a shareholder.

Events and Factors That Can Make Stock Prices Soar

Stock prices depend on a number of factors, some of which are completely beyond the control of the companies. While nothing is certain in the world of stock trading, there are several factors that reliably make a stock price soar. Depending on the degree and timing of these factors, a stock can jump in a single day or enjoy a quick rise over a longer period of time.

Earnings Forecast

Wall Street analysts set benchmarks for companies to meet, basing these forecasts on market projections and a company's past performance. Failure to meet these forecasts shows a weakness in the company, and the stock price either falls or remains stagnant. On the other hand, when a company exceeds the forecasts, the stock price generally rises due to increased investor confidence.

Government

The government does not directly control stock prices, but legislative activities do have a profound impact on the market. For example, if Congress places a tariff on foreign car imports, the stock prices of domestic car manufacturers jump because of expected market growth. Similarly, when the government awards a lucrative contract to a company to supply a product or service, the company's stock price soars.

Products

The introduction of a new product often makes a stock rise. If the product is highly anticipated, such as Apple's iPhone, the mere rumor of the product is enough to send stock prices upwards. If demand for the product proves stable, and the product boasts good sales, the company's stock jumps even more.

Labels

Investor confidence often takes the form of a label. Whether a company is deemed a blue chip stock or is added to the Dow Jones industrial average, a show of confidence by Wall Street makes a stock price rise. A positive label or rating from investment firms is enough to give any stock a boost.

Mergers and Acquisitions

A company's stock can jump with the announcement of a new merger. If a company acquires a new brand or joins forces with another company, this move usually creates a spike in the price. If the acquisition involves entrance into a new foreign market or adding a new product line, the price soars even higher.

There is no sure way to predict the movement of a stock price. While these factors are common contributors to a stock's rise, they are also the forces behind its fall. The nature of the stock market means that the things the benefit a stock are the same things that can hurt it as well.

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Steven Walker

Steven Walker is a creative writer and content strategist who helps people succeed at self-education, writing, motivation and more by sharing with them his knowledge. Writes blog posts for McEssay.

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