The three main types of splits are stock splits, reverse splits, and dividend splits.
Stock Splits
A stock split is when a company increases the number of shares outstanding by a certain ratio, such as 2-for-1 or 3-for-1. This results in a lower share price, but the overall market capitalization of the company remains the same.
- Example: A company with 100 shares outstanding at $100 per share executes a 2-for-1 stock split. After the split, the company has 200 shares outstanding at $50 per share.
Reverse Splits
A reverse stock split is the opposite of a stock split. It is used to increase the share price of a company whose stock price has fallen significantly. This is often done to avoid being delisted from an exchange.
- Example: A company with 100 shares outstanding at $1 per share executes a 1-for-10 reverse split. After the split, the company has 10 shares outstanding at $10 per share.
Dividend Splits
A dividend split is a type of stock split where the company distributes new shares to existing shareholders in proportion to their current holdings. This is usually done to increase the number of shares outstanding and make the stock more affordable for retail investors.
- Example: A company with 100 shares outstanding declares a 10% dividend split. Each shareholder receives an additional 10% of their current shares.
