Picking up where we left off yesterday, we are actually shifting gears a bit.
Short selling is a great tool when it comes to making use of the indications, however…
In this stock split guide, I’ll go over what it means for a stock to split, the effects of the split, and how you can benefit from stock splitting.
Later on, we’ll get into how shorting stock can be profitable upon gaining this sort of information.
What Is a Stock Split?
When a stock splits, the company divides its existing shares into multiple shares. It’s also referred to as a “forward split” as opposed to a reverse split, which we’ll get into later.
Have you ever seen the movie “Fantasia”?
In it, there’s an animated short called “The Sorcerer’s Apprentice” featuring an enchanted broom that Mickey Mouse chops into pieces, then the shards turn into more brooms.
That’s kind of the phenomenon with stock splitting, but with more numbers and less magic.
The split occurs when a company’s board of directors decides to increase the number of outstanding shares. They do this by issuing additional shares to current shareholders.
Despite the fact that the number of shares outstanding has increased, the total dollar amount of the shares remains the same. So by simply splitting the stock, the company doesn’t gain any value.
For example, say that a company has decided to do a 3-for-1 stock split.
Say that you currently hold 100 shares of their stock with a value of $200. When the stock splits, you will have 300 shares, but the total value will still be $200.
Why Do Stocks Split?
When a stock has a forward split, the number of shares added are typically listed by a ratio. So, if the amount of shares were doubled, it would be a 2-for-1 split. Other common ratios are 3-for-1 and 5-for-1.
Why would a company bother to do a stock split if it doesn’t increase the value of their company?
