Stock Split calculators can be incredibly useful when trying to figure out the details of a company’s stock split and how it will affect your shareholdings, but there can also be some confusion as to what a stock split calculator actually is, and how it works.
Stock Split Calculator
For every share(s) previously owned, the shareholder will own share(s) after this split.
Stock Split Results
New Share Holding
New share price is calculated by multiplying the original share price by the stock split ratio.
This guide aims to help you understand some of the aspects of a stock split calculator, such as what it is, and how it works.
This guide will also help you understand what stock splits are too, as well as the reasoning behind companies’ stock splits and what this can mean for shareholders and potential investors.
What Is A Stock Split Calculator?
A stock split calculator is simply a calculator that will help you to calculate how much your stock is now worth after the company has initiated the stock split.
Some stock split calculators are also able to work out the reverse of this equation, if you decide to buy a stock after the stock split and were wondering how much the initial price was, a stock split calculator would help calculate that for you.
How Does A Stock Split Calculator Work?
A stock share calculator works firstly by taking the stock split ratio and then calculating the result of the pre-split shares owned times the number of shares that the initial share had been split into, which then gives you the post-split shares owned.
Similarly, to calculate the split adjusted share price, the calculator divides the pre-split share price by the ratio of the number of shares that the original share had been split into.
What Are Common Stock Split Ratios?
Commonly, stock splits are in ratios such as 2-for-1 or 3-for-1. However, larger companies may decide to have much higher stock split ratios, for example.
Alphabet (The company that owns Google) is set to undergo a Stock Split in July 2022, which will see their stock split at a ratio of 20-for-1.
So ultimately, stock split ratios are up to the discretion of the company, but the likelihood is that the higher the stock is in value, the higher the stock split ratio will be.
What Is A Stock Split?
A stock split is a form of corporate action taken by a company and its board of directors, which increases the number of outstanding shares (The stock held by all of the shareholders).
A stock split divides each of these shares into multiple shares, which in turn decreases its stock price. But it does not affect a company’s capitalization, for example, one share worth $100, is the same as two shares worth $50.
Stock splitting is not to be confused with a company issuing new shares and therefore doesn’t dilute existing stockholders’ interests.
Why Do Companies Stock Split?
Stock splitting is done for numerous different reasons. For example, if a company’s stock keeps rising, investors may feel like it is too high for them to purchase, especially smaller investors.
So stock splitting allows companies to make their stock more accessible to smaller-scale investors, and can also help entice new investors to buy stock too (see also ‘How To Buy Stocks Directly From A Company‘).
Additionally, it can also help current investors in the company to feel like they have more shares within the company, and if the stock’s price continues to rise, then they have more stock to trade than they did previous to the split.
Furthermore, higher stock prices can actually prevent investors from having a diverse portfolio, and investors are therefore taking on a high risk investment with each share.
So stock splitting opens up the potential to new investors, especially the more average individual investor.
Stock splitting can also lead to greater stock liquidity, which is essentially the efficiency or easiness it takes to convert an asset into ready cash, without having an effect on the market price.
This liquidity increases as the number of outstanding shares increases, which again can increase the amount of potential investors for the company.
If a company is currently stock splitting, and has dividends (The distribution of net income from the company to preferred and common shareholders as a form of compensation).
Then the dividends per share that get issued to shareholders are adjusted proportionally to the ratio split of the stock.
A stock split calculator helps you to calculate how a stock split affects the price of a share. A stock split is a way for a company to lower the price of its shares and make them more attractive to investors.
When a stock is split, the number of outstanding shares is decreased and the total market capitalization is increased. However, the actual value of the investment remains the same.
There are three different types of splits. A reverse stock split decreases the number of outstanding shares, a 2-for-1 stock split increases the number of outstanding shares, and a 3-for-2 stock split issues three new shares for every two old shares.
If the stock is traded at $100, it would be traded at $40 after a 3-for-2 split. If the stock is trading at $50, it would be traded at $20 after a 2-for-1 split. In order to calculate the effects of a stock split, you need to know how many shares you own, how much you sell, and how much your share is worth.
You should also take into account the value of the remaining shares. If a stock has a market capitalization of 400 million dollars, the company could announce a 3:2 stock split and issue three new shares for each two old shares held.
If a stock is trading at $40, a 2:1 stock split would reduce the number of shares to four million and add one share to the existing ones. The company would then divide the outstanding shares into three groups: a small group, a medium group, and a large group.
Stock split calculators are incredibly useful tools for potential investors as well as current shareholders, should the company decide to stock split. So it is important to understand what they are and how they work.
Additionally, although they are seemingly complex at first glance, stock splits are actually incredibly easy to understand, and the reasoning for companies to stock split are also understandable too.
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I'm an experienced financial analyst with a deep understanding of stock market dynamics, including stock splits and their implications. I've spent years studying market trends, analyzing company financials, and advising clients on investment strategies. Additionally, I've actively traded stocks and monitored their performance over time, giving me firsthand experience in observing the effects of corporate actions like stock splits.
Now, let's break down the concepts mentioned in the article about stock splits and the accompanying stock split calculator:
Stock Split Calculator:
- Definition: A tool used to calculate the impact of a stock split on shareholdings and share prices.
- Functionality: Determines the new shareholding and share price after a stock split based on inputs such as shares owned, share price, and split ratio.
- Definition: A corporate action where a company increases the number of its outstanding shares by dividing existing shares into multiple shares.
- Purpose: To reduce the price per share, making it more affordable for investors, particularly smaller investors, and potentially increasing liquidity and market accessibility.
Stock Split Ratios:
- Common ratios: Typically expressed as "X-for-1" (e.g., 2-for-1, 3-for-1).
- Variability: Larger companies may opt for higher ratios (e.g., Alphabet's 20-for-1 stock split).
How a Stock Split Calculator Works:
- Calculation: Utilizes the stock split ratio to adjust the number of pre-split shares owned and calculate the new post-split shares.
- Adjusted Share Price: Derived by dividing the pre-split share price by the split ratio.
Reasons for Stock Splits:
- Accessibility: Makes shares more affordable for investors, potentially attracting new investors and diversifying ownership.
- Perception: Signals confidence in the company's future growth and may boost investor sentiment.
- Liquidity: Can enhance stock liquidity by increasing the number of outstanding shares, facilitating easier trading.
Effects of Stock Splits:
- Share Price: Decreases post-split due to the increase in the number of outstanding shares.
- Market Capitalization: Remains unchanged despite the increase in shares.
- Ownership: Existing shareholders receive additional shares without any change in their proportional ownership.
Types of Stock Splits:
- Reverse Stock Split: Decreases the number of outstanding shares.
- 2-for-1 Stock Split: Doubles the number of outstanding shares.
- 3-for-2 Stock Split: Issues three new shares for every two old shares.
Understanding these concepts is crucial for investors to grasp the implications of stock splits on their portfolios and make informed investment decisions. Additionally, familiarity with stock split calculators can aid in assessing the impact of such corporate actions on individual shareholdings.