Stock Split calculators can be incredibly useful when trying to figure out the details of a company’s stock split and how it will affect your shareholdings, but there can also be some confusion as to what a stock split calculator actually is, and how it works.
This guide aims to help you understand some of the aspects of a stock split calculator, such as what it is, and how it works.
This guide will also help you understand what stock splits are too, as well as the reasoning behind companies’ stock splits and what this can mean for shareholders and potential investors.
What Is A Stock Split Calculator?
A stock split calculator is simply a calculator that will help you to calculate how much your stock is now worth after the company has initiated the stock split.
Some stock split calculators are also able to work out the reverse of this equation, if you decide to buy a stock after the stock split and were wondering how much the initial price was, a stock split calculator would help calculate that for you.
How Does A Stock Split Calculator Work?
A stock share calculator works firstly by taking the stock split ratio and then calculating the result of the pre-split shares owned times the number of shares that the initial share had been split into, which then gives you the post-split shares owned.
Similarly, to calculate the split adjusted share price, the calculator divides the pre-split share price by the ratio of the number of shares that the original share had been split into.
What Are Common Stock Split Ratios?
Commonly, stock splits are in ratios such as 2-for-1 or 3-for-1. However, larger companies may decide to have much higher stock split ratios, for example.
Alphabet (The company that owns Google) is set to undergo a Stock Split in July 2022, which will see their stock split at a ratio of 20-for-1.
So ultimately, stock split ratios are up to the discretion of the company, but the likelihood is that the higher the stock is in value, the higher the stock split ratio will be.
What Is A Stock Split?
A stock split is a form of corporate action taken by a company and its board of directors, which increases the number of outstanding shares (The stock held by all of the shareholders).
A stock split divides each of these shares into multiple shares, which in turn decreases its stock price. But it does not affect a company’s capitalization, for example, one share worth $100, is the same as two shares worth $50.
Stock splitting is not to be confused with a company issuing new shares and therefore doesn’t dilute existing stockholders’ interests.
Why Do Companies Stock Split?
Stock splitting is done for numerous different reasons. For example, if a company’s stock keeps rising, investors may feel like it is too high for them to purchase, especially smaller investors.
So stock splitting allows companies to make their stock more accessible to smaller-scale investors, and can also help entice new investors to buy stock too.
Additionally, it can also help current investors in the company to feel like they have more shares within the company, and if the stock’s price continues to rise, then they have more stock to trade than they did previous to the split.
Furthermore, higher stock prices can actually prevent investors from having a diverse portfolio, and investors are therefore taking on a high risk investment with each share.
So stock splitting opens up the potential to new investors, especially the more average individual investor.
Stock splitting can also lead to greater stock liquidity, which is essentially the efficiency or easiness it takes to convert an asset into ready cash, without having an effect on the market price.
This liquidity increases as the number of outstanding shares increases, which again can increase the amount of potential investors for the company.
If a company is currently stock splitting, and has dividends (The distribution of net income from the company to preferred and common shareholders as a form of compensation).
Then the dividends per share that get issued to shareholders are adjusted proportionally to the ratio split of the stock.
Stock split calculators are incredibly useful tools for potential investors as well as current shareholders, should the company decide to stock split. So it is important to understand what they are and how they work.
Additionally, although they are seemingly complex at first glance, stock splits are actually incredibly easy to understand, and the reasoning for companies to stock split are also understandable too.
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