Share:
Stock Split
Purely Visual or Is There More to It?
A stock split requires the approval of the shareholders and must therefore be approved by a simple majority at the annual general meeting. Depending on the ratio of the new shares, the number of shares increases accordingly. The individual shareholder’s stake in the company remains the same, and there is no change in the company’s equity because the nominal value of each share is reduced accordingly. A clear distinction needs to be made between a stock split and a capital increase. We will delve into this topic in one of the upcoming editions.
1+1 isn’t always 2:
Objectively speaking, a stock split is a purely cosmetic measure. Shares become visually cheaper and thus easier to trade, especially for individual investors. Even if the anticipated effect is quite obvious, its impact is unmistakable. For instance, the video streaming provider Netflix announced a stock split in the ratio of 1 to 7 at the end of June. With a price of around $700, the stock had truly soared to lofty heights. On the day of the split, the price reached a high of $116, bringing shareholders a gain of 16 percent from the announcement to its completion (the prices in the chart are adjusted). An analogous upturn was experienced by the iPhone manufacturer Apple, which also conducted a split in the ratio of 1 to 7 last year.
How should I, as an investor, behave?
You do not need to take any action; the new shares will be automatically booked into your portfolio. An exact date for this measure is usually announced at the time of the stock split. The ISIN and the securities identification number are usually identical.
What happens to my stop order?
To avoid triggering an involuntary stop-loss avalanche, these orders are usually automatically deleted by your bank or broker. Nevertheless, it is advisable to manually review and possibly place a new order (adjusted to the price) on the day after the stock split. The same procedure applies on the day of the dividend cut-off as well.
Does a split have tax implications?
No, as it is not considered a new acquisition.
The Facts:
- A stock split is purely cosmetic
- It must be approved by the annual general meeting
- The number of shares increases in accordance with the ratio in which the capital measure is carried out
- The stake in the company remains the same
- In most cases, the announcement of a stock split has a short-term positive effect on stock prices
- The investor does not need to take action themselves
Our Conclusion:
A single share of Berkshire Hathaway, the legendary investment company of Warren Buffett, costs around $545,000. This is an exception. However, most boards usually include performance criteria related to the share price in their bonus regulations. Therefore, there is an increased interest in creating a certain attractiveness for investors. In essence, it remains a purely cosmetic measure.
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