"Newbies"

Humor

Themes & Topics

Glossary

Lecture Notes

Trivia & Factoids

Bloopers & Blunders: Stock Splits and Capitalization

Quotation

"A company’s market cap increases for any or all of several reasons: Investors may have bid up the price, the company may have issued more shares or split the stock, and the owners of convertible securities may have converted them to equity." "The Money 30," Money, June 1996.

Analysis

Splitting a stock should have not impact on capitalization (cap). Suppose you consider a company with 1,000 shares at a market price of $10. This company would have a cap of ($10) x (1,000 shares)= $10,000.

Now suppose this is a 2 for 1 split. This would double the number of shares to 2,000, but reduce the stock price by half to $5. Thus, the new capitalization would be unchanged: ($5) x (2,000 shares) = $10,000.