Stock splits are a standard strategy companies use to increase trading volume and open their shares to smaller investors. Although this doesn’t necessarily result in more shareholder recruitment, it can. When a company divides its equity two for one, investors possess twice as many shares, but does this increase liquidity? Want to learn more about stock splits and investing? All you need to do is follow this link and you will be connected to an educational firm.
The Psychological Impact Of Investors
An announcement by a business to split its shares typically elicits excitement and optimism among investors. A surge in trading activity during and immediately following the split may indicate that investors whose high prices had previously put off are now more prepared to purchase shares at reduced costs per share.
Additionally, stock splits can increase demand by increasing the number of individuals who can buy firm shares. This increases the likelihood that the stock will draw in regular investors, increasing trading volumes and expanding the company’s market presence.
Trade volume can also be impacted by how a stock split is seen. For instance, if a company recently declared a two-for-one stock split and there is a decline in the EPS, some investors would conclude that the business is not as profitable as it used to be.
This could negatively affect the performance of the company in the marketplace.
Investors must, however, focus more on a company’s long-term prospects than on any associated short-term profits or losses. This is because, following a stock split, your actual share value stays the same no matter how many more you possess.
Market Response: Immediate And Extended Consequences
Even though they don’t happen frequently, stock splits can significantly affect trading volume and directly change the number of shares that can be exchanged. As a result, investors with substantial positions in stocks that announce a split should modify the size of their positions appropriately.
When stocks split, the total number of outstanding shares is increased by a specific ratio, like 2-for-1. This doesn’t alter the stock’s overall worth, but it does enable investors to purchase more shares for less money.
Since there are more buyers and sellers for ten shares at $10 than one at $100, a stock split can help make equities easier to market.
Many managers look for ways to increase the liquidity of their company’s shares. Some businesses, such as Berkshire Hathaway, maintain higher stock prices rather than split their shares to accomplish identical results.
Research on the impact of stock splits on trading volumes examined the short—and long-term consequences of the events by examining executed shares in equity markets and options contracts traded for mega, large, and small-size securities in options markets.
Following each split, we saw an early spike in activity that eventually tapered off; options markets saw more significant gains but weren’t very sustained over the next six months (Exhibits 1 and 2).
Impact On The Liquidity Of Stocks
In addition to lowering the price per share, a stock split may increase the quantity of shares available on the market, which will draw investors and improve liquidity. In 2020, Apple (AAPL) conducted a 4:1 stock split, which increased investor confidence, promoted long-term investment, gave investors additional shares, and decreased the cost of Apple items for investors.
Nevertheless, a rise in liquidity does not guarantee a rise in trade volume. For example, an announcement like a stock split could result in an instantaneous surge in trading volume. Still, this spike might only continue briefly because trading volume might fluctuate based on announcements and news from other sources, such as market rumors and other events.
It is essential to consider the market’s overall state when assessing how stock splits affect trading volume. Although stock splits rarely bring about significant changes in liquidity levels, they give small investors the chance to buy shares that would have otherwise been too expensive.
Conclusion
Despite what many may think, stock splits only sometimes result in investors becoming wealthy. The number of outstanding shares multiplied by the share price of a stock determines its total market capitalization, which is the worth of the stock. This amount will only change once any split has occurred. Due to new issuers entering the market after the split, the company’s total market capitalization will remain unchanged even if investors’ share prices decline in proportion to the number of new shares issued as part of the split.
