Why are fewer companies offering stock splits?

Close-up of stock splits: advantages and disadvantages under the microscope

You will first learn what exactly a stock split is, what the reasons for such a measure are and - finally - what the consequences of a stock split are. You will also learn that there is also the opposite of a stock split.

Explanation of share splits using the example of Fielmann

Some time ago the well-known German company Fielmann carried out a share split in the ratio of 1: 2 (= 2 new shares for 1 old share). Put simply, this means that the price of the Fielmann share was roughly halved.

In return, however, the number of Fielmann shares doubled and thus also the number of Fielman shares in the depots of Fielmann shareholders. A share split is a measure with which shares are supposed to be optically more attractive (cheaper).

The most common reason for a stock split is a three- or four-digit price. If a share costs 100 or even 1,000 euros, then it looks very expensive. That scares off potential investors.

Test yourself: If one share costs € 1,000 and the other share costs € 10, wouldn't you also tend to buy the € 10 share? A purely psychological effect, since the price says nothing about whether the share is fundamentally cheap or expensive.

This becomes even clearer when you remember that many investors invest a fixed amount per stock position. The bottom line is that it doesn't matter whether you buy 1 share at 1,000 euros or 100 shares at 10 euros. You invest 1,000 euros each.

A share split solves the problem of “optically” high prices: The number of shares is multiplied (doubled in the case of Fielmann). This reduces the price per share. The shares then appear cheaper - and therefore more attractive. However, no “fresh” money flows into the company through this mechanism.

For you as an investor, a stock split is not of great importance in the first step. For example, if a company does a 1: 2 stock split, each old share is "exchanged" for two new ones. By doing this, the number of shares doubles and the share price is halved. The total value of your equity position does not change.

In the event of a stock split, the previous shares will be withdrawn and replaced by shares with a lower nominal value. Also important for you: The securities identification number (WKN) and the International Securities Identification Number (ISIN) remain the same.

The historical price development is adjusted

Normally, a stock split in the chart (the optical course of the price) would result in a price slump.

In a 1: 2 stock split, in which two new shares are issued for one old share, both the nominal value and the market value would suddenly be halved, which could lead inexperienced investors to believe that the price has fallen by 50%.

For this reason, the historical prices in many chart and price analysis programs are automatically adjusted so that a stock split cannot be seen in the graphic.

In most of the presentations of the trading systems, however, the times of splits are marked. The same applies to the trading volume, which in this example - viewed in units - would suddenly double.

Stock splits can favor positive price developments

In general, a share split can promote a positive price development of a share - but it does not necessarily do so. Therefore, you should not assume that the price development will automatically benefit from such a step.

In isolation, the announcement of a stock split is not a reason to buy. In most cases you can assume that a stock split will appeal to new investors, but you should definitely analyze the overall situation of the company before making a purchase and include the company's prospects in the assessment. The stock split is then just an additional plus.

The opposite of a stock split is what is known as a reverse split

The exact opposite of a stock split is what is known as a reverse split. In German this means something like reverse stock consolidation. While a stock split is used to make the price of a stock look optically cheaper, a reverse split is used to make the price look more expensive.

However, other goals can also be pursued with a reverse split. If the shares of a company are traded at very low market prices - more precisely below the nominal value of the shares - the German Stock Corporation Act prohibits the company from issuing new shares, since new shares may not be issued below the nominal value of the old shares.

Specifically, this means that a capital increase is then no longer possible and a stock corporation can no longer obtain fresh money on the stock exchange. Fear of this prompted Commerzbank, for example, to carry out a reverse split last year.

Stock consolidation or reverse split using the example of Commerzbank

As a result of the reverse split, Commerzbank had a share consolidation at a ratio of 10: 1 last year. The value of the Commerzbank share increased tenfold as a result. As a result, Commerzbank shareholders were not suddenly richer than before, as they only received 1 new share for every 10 old shares.

As already mentioned, Commerzbank decided to take this step because the share price had previously threatened to drop below the 1 euro mark. And that in turn would have meant that Commerzbank would no longer have been able to increase its capital, which would have meant that Commerzbank would no longer have been able to collect new money on the stock exchange.

Shortly after Commerzbank carried out the reverse split, a capital increase followed, as the bank urgently needed money to repay state aid it had received.

Conclusion: stock splits and reverse splits are neither generally good nor generally bad

In conclusion and in summary, it can be said that stock splits and reverse splits are neither fundamentally good nor fundamentally bad. Stock splits often lead to the fact that the share subsequently attracts new investors due to the optically more favorable price and thus rises.

But this is by no means automatic and therefore no “profit guarantee” either. Incidentally, a positive example from this year is Apple shares. But only marginally.

Now we come to a reverse split: This is not necessarily bad just because a company wants to keep the option of a capital increase open. But you should be wondering why the stock fell so low before that. This is often a warning sign.

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