?? Could a share split bring new impetus?
?? ?? even if it’s just a psychological trick
?? Cheaper stocks target a larger audience
A classic stock split is a corporate action in which the shares of a group are divided by a fixed quota. For example, if a company splits its shares at a ratio of 1: 5, the number of shares issued will be quintupled while the price per security will be fifth.
An example of a stock split
In the run-up to a stock split, the shareholders of a company must first vote on a possible stock split and the exchange ratio at the general meeting. A simple majority is enough to carry out a stock split.
If the securities to be allocated are shares with par value, the old shares will be canceled and the proposal supported by the majority of shareholders will issue new shares to shareholders with the same security identification number. If, on the other hand, the shares have no nominal value, the division is made by amending the articles of association.
For example, if the shareholders agree on a share split of 1: 5, each shareholder will receive five new shares for one old share. If the underlying asset was $ 1,000 before the split, it’s only $ 200 after the stock split. In addition, the number of shares available will increase from, say, one million to five million.
The main reason for a stock split
A stock split converts existing shares into a larger number of new shares with a lower value. With such a step, the price per share is reduced immediately. The stock in question looks visually cheaper and is usually easier to trade, as the lower price appeals to a larger target group. For example, stocks priced at $ 10 are payable to each class of investor, while stocks priced at $ 2,000 each require a certain amount of principal on the part of the investor.
Many managers only want to outsmart the psyche of small investors with a stock split. Because whether a share costs 10 or 2,000 euros does not say anything about the quality of a company. Even so, high stock prices are very daunting and unattractive for many retail investors and ultimately decide to buy optically cheaper stocks, regardless of the company’s fundamental valuation.
With the help of a stock split, the company’s bosses try to increase their own stocks, relying on a calculated mistake that is particularly common among many private investors.
The advantages for investors and companies
Stock splits usually have a large impact on the performance of a security. The announcement of a split often leads to a short-term price increase. Accordingly, a stock split can be particularly worthwhile for existing shareholders. In theory, it’s still a zero-sum game.
But not only the shareholders benefit from rising share prices, but of course the company too. For a group, a stock split usually means fresh capital, as the optically more favorable stock prices usually lead to higher demand.
In contrast to a capital increase, which can also bring in fresh money, the existing shareholders are not diluted by a share split, which is also a very positive argument for a split from the shareholders’ point of view.
The disadvantages for investors and companies
New investors who are only made aware of a stock after an announced stock split should not invest their money solely on the basis of this measure. This is because stock splits are common when a company’s stock price has skyrocketed over a long period of time or the stock has been trending sideways for some time. Since these two scenarios are by no means a reason to buy, new investors in particular should listen carefully to a stock split and keep an eye on the fundamental data situation.
A stock split generally does not adversely affect a company, even if reliable data is not available. After all, it’s impossible to determine how well or how badly a stock would have performed without the stock split. Nevertheless, there are some company bosses who are expressly against stock splits.
Buffett still doesn’t believe in stock splits
The best-known opponent of the stock split is US multi-billionaire Warren Buffett. While he doesn’t mind if the companies he owns do a stock split, that is out of the question for him and his financial holding Berkshire Hathaway. It is therefore not surprising that Berkshire Hathaway A-share is the most expensive stock in the world at over a quarter of a million dollars.
Although Berkshire Hathaway B-shares have also existed since 1996, with a current ratio of 1: 1,500 owned and 1: 10,000 of the voting rights of the A-share, these were only issued to allow mutual funds to rebuild the Buffett portfolio for high-paying retail investors to offer.
With the extremely high price of a Berkshire Hathaway B share, Buffett wants to prevent his company from being used by smaller shareholders for short-term speculation. Buffett said the high share price is designed to protect the financial holding’s shareholders from a speculative bubble and extreme volatility.
Effects on taxes and derivatives
According to the German Securities Protection Association, there is no tax burden in the event of a stock split, provided that the securities identification number remains the same. As soon as the WKN changes, the German tax authorities can classify the share split as a kind of dividend in kind. In this case, the existing shareholder would have to pay the withholding tax.
A stock split naturally has a direct effect on all certificates linked to the underlying. However, these derivatives are adjusted according to the split ratio depending on the issuer. In this context, too, there is no disadvantage for investors. Accordingly, as an existing shareholder, you can always be happy when your own company announces a stock split.
Pierre Bonnet / Redaktion finanzen.net
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