Stock split can be referred to as a division of shares into shares with a lower face value. The overall mechanics are structured in a manner in which total market capitalization of the stock post-split tends to remain the same.
This means that the entire value of the total value of the holding day on the day of the split is not supposed to change with the number of shares going up.
Stock splits are mainly carried with the intention of increasing liquidity. With an increase in liquidity, it can be seen that more buyers and sellers trade on the market, which helps to bring prices to equilibrium.
The overall impact of stock prices over the course of time tends to vary based on a number of circumstances. In almost all cases, after a stock split, the number of shares that are held by a shareholder increase.
The caveat in this regard is the fact that the price per share reduce, because the shareholders now get more shares for the given price. The market capitalization in this regard stays the same.
From an investor’s perspective, it can be seen that prices that stockholders get for shares actually declines, whereas the total shares that they hold in hand increases.
Theoretically speaking, it can be seen that the number of shareholders tends to increase because the investors would purchase the shares at relatively lower prices now.
Therefore, as an immediate outcome of the stock split, it can be seen that investors might not always be happy as a result of this, because of the fact that their investment fills further go down.
However, in certain cases, the prices of the stock is also expected to go up, in the case where the stock prices have considerably risen prior to the stock split, and it is further anticipated that the prices will increase subsequently over the course of time.
Hence, this would act as signaling in the market, essentially because of the reason that it would give the users a formative right to ensure that they are able to increase their earnings over the course of time.
Hence, the increase in stock price followed by the stock split decision is mainly fueled by the fact that there are numerous speculations about the company hitting a good deal, as a result of which financial position of the company is expected to increase over the course of time.
However, it must be accounted for that increase in prices occurs in only selected situations and circumstances, and therefore, cannot be generalized across the larger picture, to say the least.
In this regard, the question that appears is the fact it investors should hold or sell off their investment after the stock split. The answer to this question mostly lies in the financial statements of the company, and the existing impact it has on the valuation of the company.
The valuation of the company is of tantamount importance in predicting the long term financial standing of the company, and the prospects it holds for the investors. The best course of action in this regard is therefore to study the market dynamics, and then act in accordance with the future outlook it holds for the returns.
In the same manner, the role of market speculations followed by a stock split cannot be denied either. This is essentially due to the reason that signaling tends to create an unwarranted herd behavior amongst the public, and this results in snowballing impact within the market.
Whilst this might not be an entirely accurate measure of the market positioning, yet it can be seen that it does impact the overall standing of the company.
There is no doubt to the fact that stock splits tend to have a different impact on the investment depending on different situations. As a matter of fact, it can be seen that most individual share price tends to decrease because of increase in the number of shares. The overall market capitalization tends to stay the same, and therefore, the investment stays intact.
However, what must be included in analysis at this point in time is the fact that stock splits mostly result in creating speculation, and an unprecedented wave of uncertainty within the investors because of which the subsequent impact on stock prices is questionable.
In the cases where there is a positive speculation, it can be seen that stock price may further go up after the stock split, because it would be expected that the overall prices would further increase.