Legal Definitions - share split

A share split (also commonly referred to as a stock split) is a corporate action where a company increases the total number of its outstanding shares by dividing each existing share into multiple new shares. While the number of shares an investor owns increases, the price of each individual share is proportionally reduced, ensuring that the total value of an investor's holding remains exactly the same immediately after the split. Companies typically undertake share splits to make their stock more affordable and accessible to a wider range of investors, which can enhance the stock's liquidity and trading volume.

• Example 1: Making a High-Priced Stock More Accessible

  Imagine "Quantum Innovations Inc.," a highly successful technology company whose shares have risen to $800 each. While this reflects strong performance, the high price might discourage smaller individual investors from purchasing shares. To broaden its investor base and make its stock more attractive, Quantum Innovations Inc. announces a 4-for-1 share split.

  This illustrates a share split because an investor who previously owned 10 shares of Quantum Innovations Inc. at $800 each (a total investment of $8,000) would now own 40 shares. The price per share would adjust to approximately $200 ($800 divided by 4). The total value of their investment remains $8,000 (40 shares multiplied by $200 per share). This action effectively lowers the per-share price, making the stock appear more affordable and within reach for a greater number of potential investors without altering the company's overall market value or the investor's total wealth.

• Example 2: Enhancing Liquidity and Trading Volume

  Consider "Evergreen Utilities Corp.," a well-established company with a stable but relatively high share price of $300. The company's management observes that its stock has lower trading volume compared to similar companies, possibly due to the higher price point. To boost market liquidity and encourage more active trading, Evergreen Utilities Corp. decides to implement a 3-for-1 share split.

  This demonstrates a share split as an investor holding 100 shares at $300 each (total value $30,000) would, after the split, possess 300 shares, with each share now priced at roughly $100. The increased number of shares available at a lower price often leads to higher trading activity, as more investors find the stock's price point appealing. This increased accessibility can improve the stock's liquidity, making it easier for buyers and sellers to trade shares.

• Example 3: Signaling Confidence After Significant Growth

  "BioHealth Solutions," a pharmaceutical company, has experienced substantial growth and positive clinical trial results, causing its share price to climb from $75 to $450 over a few years. To acknowledge this success and make the stock more appealing to a wider audience, including new retail investors who might perceive a $450 share price as expensive, the company declares a 6-for-1 share split.

  This example highlights a share split because an investor who owned 50 shares of BioHealth Solutions at $450 each (total value $22,500) would, after the split, own 300 shares, with each share now trading at approximately $75. This strategic move not only makes the stock more accessible but also often serves as a positive signal from the company's management, indicating confidence in continued future growth and a desire to broaden the ownership base, thereby making the stock more attractive to a larger pool of investors.