How do you know if a stock will split? (Explained)

In subjective terms, it isn’t a problem for any shareholder to know if their company is going for a stock split in the near future. All listed companies share their financial reports quarterly and annually through exchanges and publish them to make accessible for shareholders.

Any significant news relating to the company is also disclosed duly in compliance with stock exchange and securities exchange commission guidelines.

When a company is performing well its share prices move upwards, to a certain point, the management may decide for a forward split to control the share price.

A forward stock split considered a strong performance signal is always perceived positively and announced well before the transaction date.

A Reverse split, however often is performed to stabilize a company ailing share prices, which often is considered a negative impact signal.

As investors, it’s easier to know about a forward stock split than a reverse split. Apart from statuary requirements large firms performing forward stock split would announce well advance to cash on the positive publicity.

After an IPO if the stocks perform well the firm may undergo several forward stock splits, which always indicated a strong financial position of the company.

Stock trading with higher market share price becomes difficult, large and institutional investors become skeptical and stock trading gets slower.

To increase the stock trading and enhance the liquidity, the management often decides to lower the share prices through a stock split. A lower share price attracts retail investors and trading increases, which subsequently increases liquidity for the company.

How to know if a forward stock split will happen?

Apart from media announcements, there are other ways investors should keep an eye on to know if their company will go for a stock split:

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  • It becomes almost inevitable when share prices rise too much e.g. Apple Inc. performed a stock split when the share prices touched a $700 mark.
  • Read Stock Market Analysts reviews, they are the gurus of the stock markets, so give an ear to their advice.
  • Financial Statements give a hint when there is a lot of profit and low cash, one of the options a company may use is a forward stock split.
  • A forward stock split attracts positive publicity, often the company would like to cash on that opportunity.

How to know if a reverse stock split will happen?

Unlike a forward stock split, companies do a reverse stock split when in despair, however, the symptoms start revealing earlier:

  • Stock exchanges keep an eye on low performing shares, if the share price fall below $1 the company will be issued a delisting notice, the tried and tested method for a company will be to go for a reverse stock split.
  • When a company share price fall consistently downwards, or a major event that sharply declines a company’s share price, a reverse stock split becomes inevitable.
  • The company needs to comply with both government and exchange market laws regarding a reverse split, a certain number of shareholders, shareholding dilution ratio, and timely informing the shareholders are some of the common compliance rules that will help shareholders remain aware.

Regulatory and compliance requirements aside, the most important factor for a stock split is the exact reason for which the company opts for it.

Theoretically, shareholders, total wealth remains unchanged with a stock split, but practical implications of a forward and reverse stock split are poles apart. When a company enjoys good financial health and its share prices increase excessively it performs a forward split that does not affect the shareholders at all.

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After a forward split, share prices increase again after an initial fall as the “signaling effect” impacts positively. Shareholders need to remain aware of a reverse stock split, however, as that point is often considered to be the last remedy for the company to save itself from delisting.

In a reverse stock split, either option of selling or buying stocks immediately cannot salvage the shareholders unless the company is taking drastic corrective measures too.

In conclusion, shareholders will be notified well in advance if the management decides for a forward stock split. The share prices, financial statements, and stock market analysts are all indicators of a near-future stock split.

However, shareholders need to be more skeptical and vigilant about a reverse stock split, as a delisted company will be trading a “penny stock” and the net wealth practically will often reduce.

The company will more likely be also be delisted from a stock exchange to an open market over-the-counter (OTC) market for share trading.

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