Legal Definitions - stock split

A stock split occurs when a company increases the number of its outstanding shares by dividing each existing share into multiple new shares. While the number of shares increases, the total value of a shareholder's investment and their percentage of ownership in the company remain exactly the same. The primary purpose is to lower the price per share, making the stock more affordable and potentially more attractive to a wider range of investors, thereby increasing its liquidity (ease of buying and selling).

• Example 1: Expanding Tech Company
  Imagine "InnovateTech Inc." is a rapidly growing software company whose stock has soared to $800 per share. Many individual investors find this price point too high to buy a meaningful number of shares. To make its stock more accessible, InnovateTech Inc. announces a 2-for-1 stock split. This means for every one share an investor owned, they now own two shares. If an investor previously held 10 shares worth $800 each (totaling $8,000), after the split, they would hold 20 shares, each now valued at $400. Their total investment value remains $8,000, and their proportional ownership in InnovateTech Inc. is unchanged, but the lower per-share price makes it easier for new investors to purchase shares.
• Example 2: Mature Retail Chain
  "GlobalMart Stores," a well-established retail giant, has seen its stock price steadily climb over many years to $300 per share. While not excessively high, the company's management believes a lower price could boost trading volume and attract more small-scale retail investors. GlobalMart decides to implement a 3-for-1 stock split. An investor who owned 50 shares before the split (total value $15,000) would now own 150 shares, with each share priced at $100. This move increases the total number of shares available in the market, potentially leading to greater trading activity and broader ownership without diluting the value of existing shareholders' investments.

Conversely, a reverse stock split is the opposite action. It involves a company reducing the number of its outstanding shares by combining multiple existing shares into a single new share. Similar to a regular stock split, the total value of a shareholder's investment and their percentage of ownership remain unchanged. The main effect is to increase the price per share, which can help a company meet minimum stock exchange listing requirements or project a more stable financial image.

• Example 1: Biotech Startup Facing Delisting
  "BioHeal Pharma," a small biotech company, has experienced financial difficulties, causing its stock price to drop to $0.50 per share. The stock exchange on which BioHeal Pharma is listed requires a minimum share price of $1.00 to avoid delisting. To rectify this, BioHeal Pharma implements a 1-for-10 reverse stock split. An investor who owned 2,000 shares at $0.50 each (totaling $1,000) would now own 200 shares, with each share valued at $5.00. This action raises the per-share price above the exchange's minimum requirement, helping the company maintain its listing and potentially attract more institutional investors who often avoid "penny stocks."
• Example 2: Company Seeking Institutional Investment
  "Quantum Innovations Inc." is a growing technology firm whose stock trades at $8 per share. While not in danger of delisting, the company's board believes that a higher share price would make the stock more appealing to large institutional investors and mutual funds, which sometimes have policies against investing in lower-priced stocks. Quantum Innovations Inc. decides on a 1-for-4 reverse stock split. An investor holding 100 shares at $8 each (totaling $800) would now possess 25 shares, with each share priced at $32. This strategic move aims to enhance the company's perceived value and attract a different class of investors, potentially increasing its market credibility.