Stock Split. Stock Splitting is a non-event.
Stock Split is a Non-Event
Theoretically, a stock split can be considered a non-event. The fraction of the company that each share represents is lessened, while each stockholder is given enough shares so that his or her total fraction of the company owned remains the same. On the same day of the split, the true value of the stock will be adjusted so that the total capitalization of the company can remain the same.
An ordinary split can often drive the new price per share up, as more of the public is attracted by the lower price. When this happens, a company might split when it feels its per-share price has risen beyond what an individual investor is willing to pay. This is because they usually bought and sold in the 100's. They might, next, wish to attract individuals to stabilize the price, as institutional investors buy and sell more often than the individuals do.
Once the split takes place, shareholders recalculate their cost basis for the newly split shares. Recalculating the cost basis is usually minimal. The shareholder's cost does not change at all; it's the same amount paid for the original block of shares, including commissions. The new cost per share is the total cost divided by the new share count.
Recalculating the cost basis might seem complicated when a fractional number of shares is involved. For example, 33 shares would become 49.5 shares following a 3:2 split. For a dividend reinvestment plan, the plan will credit the account holder with 49 1/2 shares. Fractional shares becomes very common in these sort of accounts.
The company can also do any of the following:
- Issue fractional certificates.
- Round up, and give the shareholder 50 shares.
- Round down, and give the shareholder 49 shares. This can happen among penny stocks.
- Sell the fractional share and send the shareholder a check for its value. This is the most common method for handling fractional shares following a split.
Accounting for the cost basis of the first three methods is minimal. Accounting for the most common case, the last one, is complicate
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