Stock distribution or share division occurs when a company increases the number of its outstanding shares by splitting each existing share into multiple shares. This results in a lower share price but an increased number of shares in circulation.
In the world of finance, a stock split might sound like a complex concept, but it's actually a straightforward measure taken by companies to make their shares more accessible. A stock split involves dividing a company's issued shares into a larger number, without altering the total value of the company.
For instance, one share might become two, resulting in a corresponding decrease in the price per share, which is halved. This is similar to cash exchange, where dividing money into smaller bills does not change the total value in one's wallet.
Companies perform stock splits for several reasons. One of the main objectives is to increase liquidity by attracting more retail investors, potentially boosting trading volume and market liquidity. A lower share price can also broaden the investor base, making shares more affordable and accessible to a wider range of investors.
A stock split can also signal management's optimism about future growth, enhancing tradability, and aligning with industry standards. However, it's important to note that a stock split does not immediately change the value of the company, and the initial increase in the share price after a split is not guaranteed.
After a stock split, the total value in a portfolio remains unchanged. The investor holding 10 shares of a company before a 1:5 stock split would have 50 shares after the split, with the nominal value of each share decreasing to 20 euros, maintaining the total investment value.
Investors should also consider their own type and investment strategy when deciding whether to buy before a stock split. Up-to-date stock market news can be obtained through apps like S-Invest or websites like boerse.de to keep track of such events.
Impact investing, a form of sustainable investing, is another popular strategy. This approach focuses on investments that generate positive social and environmental impact, in addition to financial returns. For those interested in this strategy, the guide "5 Investment Strategies for Investing in Stocks" and the article "Boost your income with Dividend stocks" provide valuable insights.
Remember, the decision to buy or not buy before a stock split depends on the further development of the price. Always do your research and make informed decisions based on your investment goals and risk tolerance.
Other than increasing liquidity and attracting more retail investors, a stock split can also broaden the investor base by making shares more affordable and accessible to a wider range of investors due to a lower share price. Meanwhile, for those who prefer investing in organizations that generate positive social and environmental impact, impact investing could be a suitable alternative strategy, offering both financial returns and a focus on sustainable development.
