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Stock Splits

According to Investopedia, a stock split is

a corporate action in which a company divides its existing shares into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because the split did not add any real value. The most common split ratios are 2-for-1 or 3-for-1. (Investopedia, LLC., 2016)

• A 2:1 split means that the shareholder receives one additional share for each share owned.
• A 3:1 split means that the shareholder receives two additional shares for each share owned.

Suppose that JML has $5.00 par value common stock with 100,000 shares authorized, issued, and outstanding in 2017. Shares are currently selling for $100 each. JML declares a 2:1 stock split to all owners on June 1, 2017. On June 1, 2017, JML will have $2.50 par value common stock with 200,000 shares authorized, issued, and outstanding, and the selling price per share will be approximately $50 after the split.

What does this mean? The shareholders’ position is the same; the company is the same. Big deal!

Well, it is a big deal, because the stock has become much more affordable, and more people will be able to invest in JML. With the shares of JML being reduced in price, the stock becomes more attractive as an investment.

The common stock would appear as follows before and after the stock split:

• prior to the 2-for-1 stock split
  • common stock: $5.00 par value x 100,000 shares authorized, issued, and outstanding = $500,000
• after the 2-for-1 stock split
  • common stock: $2.50 par value x 200,000 shares authorized, issued, and outstanding = $500,000

Note that the dollar amount on the balance sheet for common stock did not change.