Stock Splits and Bonus Issues – Corporate Actions Explained
A Stock Split is a basic mandatory corporate action event. It is simply when the company decide to increase the number of shares in the market without adjusting the total capital, which means that the price of the shares is reduced accordingly. Stock splits are sometimes also called subdivisions, and really as far as the shareholder is concerned they are exceptionally similar to bonus issues and stock dividends, i.e. the shareholding is increased and the market price is reduced.
New shares resultant from a stock split are issued free of charge to shareholders. On the effective date of the stock split the price per share is adjusted to take into account the increased number of shares in issue.
Stock Splits are very common in the USA, where companies regulary announce 2 for 1 splits, with a corresponding reduction in market price of 50%.
Example of a British Stock Split:
Current market price of shares GBP3.30 nominal value GBP0.25
Terms: GBP0.05 nominal for GBP0.25 nominal value or 5 (new shares) for (1 old share).
Each share of GBP0.25 nominal value is subdivided into 5 new shares, each with a nominal value of GBP0.05.
Initial Holding: 50 shares of GBP0.25 is subdivided into 250 new shares of GBP0.05
All things being equal (not allowing for share price fluctuations) the new share price would be GBP 0.66.