Stock splits increase the number of shares, but do not make you richer in a magical way – Moneysense

David Goldreich, a financial professor at the Rotman School of Management of the University of Toronto, says that stock splits by investors are sometimes seen as a positive signal. “When the manager does a split, it is reasonable to interpret it as management is convinced that the future looks good,” he said. He said that if managers expect a rough patch at a company that could harm the price of its shares, it is unlikely that they will want to split them, but if they are optimistic about future growth, a split may be more likely.

Goldreich said that companies sometimes split their shares to maintain their share price within what is seen as a ‘normal reach’, which he applies between $ 50 and $ 100 per share.

Stock split makes shares cheaper, not more valuable

Stock split does not create shareholder value, they only divide the ownership of a company into smaller documents. If you have 100 shares in a company with a share price of $ 10 each and it splits, you share two-for-one, you doubles the number of shares you have, not the value of your participations. Your investment in dollar terms remains the same. Instead of owning 100 shares with a price of $ 10 per share worth a total of $ 1,000, you now have 200 shares at a price of $ 5 per share – the total value is still $ 1,000.

Then the supermarket Retailer Loblaw Cos. Ltd. Last month, shares were split on four by one, it said that it did to ensure that his shares remained accessible to retail investors and his employees participating in the ownership plan of the employee share and to improve liquidity. LOBLAW shares acted for more than $ 200 each before the split, making it an expensive purchase for small individual investors who wanted to buy a position of 100 shares in the company.

Will Gornall, associate professor at the Sauder School of Business of UBC, uses the analogy of a pizza when explaining how a stock splitting works. If you have three pieces of pizza and they are two-for-one split, you will get six pieces of pizza, but the total amount of pizza you have is the same, the pieces are simply smaller. “It does not change the basic principles of the company in any way, just like cutting the pizza differently, you no longer create pizza,” Gornall said. “The amount of pizza has not changed, but now you have more slices.”

It is the same for shares.

Chip maker Nvidia, who split his stock last year, said that it did to make his shares more accessible to employees and investors. Shares in Nvidia acted for approximately US $ 1,200 each before the split last year. The move brought the share price immediately after the split to approximately US $ 120 per share, but the total shareholder value of the company was unchanged.

How stock splits influence dividends and taxes

Goldreich added that when dividend payment companies split their shares, they generally adjust their dividends to the split to keep things constant. But if a company retains the same payment per share after the split, it effectively increases the dividends paid to shareholders. If that happens in a two-for-one stock split, “what they do is that they double the dividends,” Goldreich said.

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There are also adjustments that should be made when it comes to taxes when you sell shares that have been divided since you have purchased them.
For example, if you have purchased 100 shares for $ 10 each and split them two-for-one, your costs for the shares when calculating the capital profit when you sell them must be adjusted. While you paid $ 10 per share when you bought them, the adjusted costs become $ 5 per share after the two-for-one split because you now have the number of shares twice. That means that if you sold the shares after the split for $ 10, you would achieve a profit of $ 5 per share.

Goldreich said that the most important thing to remember is that there is no free money with stock splits. Although you may have more shares in a company, this does not mean that your investment is worth more. “You can’t get richer in a magical way,” he said.

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