Dividends and stock splits
The board of directors of the company meets every quarter and decides how much of the profits to pay out to shareholders in the form of cash dividends (or not to pay them). If a positive decision is made on this payment, the board of directors also sets a cut-off date from the register (date of record). This means that the shareholders of the company registered as such up to and including that date have the right to receive the declared dividend. Therefore, a person who buys shares of a company after the cut-off date must wait until the next payout in order to receive a dividend. Because of this, the next day after the cut-off date from the register, the market price of the share decreases by the amount of the dividend paid on it (exdividend).
If the companys profits increase, the board of directors may increase the previous rate at which the dividend is calculated, or announce the payment of an additional dividend (extra dividend). This term should not be confused with another term that looks similar to it - ex-dividend, which means "without a dividend", that is, it applies to shares sold on the day after the cut-off date from the register. On the other hand, if the dynamics of changes in profits is unfavorable, the board of directors may reduce the amount of dividends paid or not pay them at all. The announcement of the payment of dividends, whatever it may be, is published in a special section of the newspaper.
There are situations when the management of a corporation does not want to spend cash on paying dividends and at the same time reward its shareholders. In this case, the board of directors may declare the payment of a dividend in the companys shares. Lets use an example to show how this happens. The owner of 100 shares of a company that has declared a 10% dividend in securities will receive another 10 shares of the company, although now the value of 110 shares will be the same as the original 100 shares. In fact, this means that the common "pie" is now cut not into ten, but into eleven "pieces". If the cash dividend paid per share remains the same, it follows that the shareholder will receive a higher dividend income in the future. However, if the cash dividend per share decreases due to the increase in the number of shares, or if the company does not regularly pay dividends in cash and does not plan to continue to do so, in fact the shareholder does not receive anything from the additional shares. In this case, the management of the company, of course, must explain its actions to the shareholders.
Much of the above applies to stock splits, regardless of whether the stock split is 2 to 1, 3 to 1, 3 to 2, etc. For example, if there are 2 million shares of Company XYZ outstanding and its board of directors announces a split of these shares in the ratio of 2 to 1, after which 4 million shares will be in circulation, that is, 2 times more than before the split. If the share price before the split was $50, then after it it will fall to $25. At the same time, earnings per share are halved. Of course, now the shareholder who had 100 shares before the split will become the owner of 200 shares, but their total value will not change (its like changing a 10 cent coin for 2 x 5 cents). In other words, if the dividend per share does not increase, the shareholder will not receive any real benefit from the split of the companys shares.
There is, however, a theory which is based on the fact that the cheaper one share, the more attractive it is for most investors and therefore it is easier to sell it. To some extent, this is true. For a number of reasons, primarily of a psychological nature, investors prefer to own multiples of 100 shares (such blocks of shares are called a standard lot) rather than any other options other than 100 units (custom lots). Many investors sincerely believe that the value of 600 shares of $5 each will rise faster than the value of 200 shares of $15 or 10 shares of $300. Although the price of cheap shares is indeed more volatile, as experts say, that is, it changes more dynamically, nevertheless, the future value of shares is much more influenced not by their current price, but by the dynamics of changes in the companys profit.
Of course, inexperienced investors can misinterpret both stock splits and the associated low stock prices in general. But buying a $20 stock isnt always a better deal than a $40 stock. In fact, the more expensive stocks are often offered by the leading companies in their industries.
An example of this in the office equipment industry is IBM, in the automotive industry - General Motors, as well as Alcoa Alumunium, Johnson & Johnson and a number of other leaders in their industries. Although their shares have been subject to stock splits at one time or another, the management of these companies most likely knows very well that their shares are well received by investors if the price for them "inspires respect".
Thus, when a company resorts to a share split and announces it, this is the most common thing, especially when it comes to leading companies, and then the necessary and sufficiently detailed information about it appears in the newspapers. So, in the Wall Street Journal, after the company symbol, the letter s is put (from split - splitting) in case of splitting its shares, and after the splitting took place and the resulting shares began to circulate on the market, the letter n is put after the name of the company ( from new shares - new shares).
A few years ago, fragmentation rarely went unnoticed. In addition, there is a transitional period of at least one week during which both "old" stocks and new "split" stocks are traded on the market. During this period, the trading of "split" shares takes place on the "when-issued" condition, which means that the companys management has decided to issue new shares, but the shares themselves have not yet been issued or have not yet entered the market.
Today, the stock split process is much faster and less formal, but the basic steps, while hidden, remain essentially the same.
In Wall Street practice, a share dividend provides for the distribution of at least 25% of issued shares. A partial stock split is a distribution of 25 percent or more, but less than 100 percent, of issued shares. A share split involves the distribution of 100 percent or more of outstanding shares.
After a severe bear market, the share price may drop to unsustainable levels. In this situation, the board of directors may announce a reverse split. Stocks that fall to low prices may be delisted or simply ignored by the investment community. In this case, a reverse split can be a suitable solution to the problem. For example, a 1 for 10 reverse split could raise a stocks price from 1.25 to 12.50. The effect here is the opposite of a stock split, the essence of which was explained above. However, due to circumstances that are not always favorable, reverse splits rarely help stocks get the right momentum quickly.
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