What is a Shares Split?

Shares are split when a company's share price has grown so high that investors think the shares are too expensive to buy, so the company divides them into multiple shares. In effect, investors are holding twice the amount of shares with half the price.

Many splits do not increase the price, and some splits cause a price reduction. Splits also reduce cash flows. There are only two reasons why share splits can raise prices: companies are selling shares too low or they want to cut costs by increasing liquidity. Basically, it's all about Earnings Per Share and Price-Earnings Ratio, which should stay the same before and after the split.

A common stock split is 2-1, where each share becomes two shares. The number of shares outstanding increases, but the total dollar share value remains the same. For example, shares in company ABC are $2,000 each. To own 100 shares, investors would need to buy $200,000. If each share is worth $10, investors would only need to pay $1,000 to own 100 shares.

Companies splitting shares go through a process. First, the company would make an ASX announcement with an Ex date (which may also be reported to the AFR). The company would then let its shareholders know about the split either by electronic mail or usual mail. Trading of the split shares start at business open and end on the Ex date. At the end of the split share month, shareholders sponsored by brokers receive a Clearing House Electronic Subregister System (CHESS) statement.

Is Shares Split Good or Bad?

Some investors consider a shares split a sign that a share is doing well, so they increase buying activity. A word of caution though. Split share announcements can be a ploy to seek attention. Do not depend on a stock split announcement alone when buying shares. As with any investment decision, research and weigh all risk factors before spending your capital. Look at the big picture and observe market trends.