The split or unfolding of a share is a common type of operation in finance that consists of dividing the nominal value of the shares in a certain proportion and simultaneously creating a new number of shares in the same proportion.
A split consists in increasing the number of shares in circulation of a company, dividing the original ones in new shares of lower nominal value. The increase in the number of shares and the decrease in the nominal value of the new shares is inversely proportional. The splitting obtained by splitting a share is usually done to provide more liquidity for trading in the financial markets. When a split occurs, the shareholders begin to have in their portfolio with a greater number of securities at a lower price, taking into account the proportion used.
There are occasions in finance when the share price of a company may be so high as to continue attracting small buyers, and this may affect its growth. For this reason it is common to carry out splits that make the individual market price of the share lower and more attractive without affecting the shareholders.
Through a mathematical adjustment, the companies manage not to modify the composition and structure of their shareholders, since it basically respects the proportion in which the shareholders have been participating in the company. In other words, when a split is performed, a new equivalence situation is created with the previous one to the operation, in which the shareholders of the company that performs it maintain their same level of participation regardless of the change in the number of shares with which count.
This operation does not mean that the shareholder is harmed, since there is no detrimental effect for it because it continues to have the same value in the portfolio. Alternatively there is also the opposite case with financial operations by counter-split of a share .
Example of splitting an action
If we take the example of a company that decides to reduce the nominal value of its shares to 50%, the number of these will double and the value of each separate share will also acquire half the value that it originally had.
Company A has a total of 100 shares at 4 euros per share and decides to reduce its nominal value by 50%. As a result, company A will see the number of shares doubled and their individual value halved. We would have 200 shares at 2 euros per share (100 x 2 and 4/2).
A split doesn’t always have to be in the 2 × 1 ratio, any ratio is valid. For example, in June 2014, the Apple company carried out a 7 × 1 split, in which it divided one share into seven.
The first, to make clear that the split is carried out by the company, does not imply any outlay, either positive or negative, for the investor. The objective of the company with this operation is to improve the trading of its shares, making them more accessible to investors. For this, lower prices are more attractive to buy and sell, which increases their liquidity.
This fact is known as the psychological effect of the investor, the small investor tends to buy cheaper securities, since he can buy a greater number. What happens is that as a company grows, so does the value of its shares, being able to reach a point where prices are so high that its liquidity is slowed down.
Continuing with the case of the Apple split: before the operation, the stock was trading at around $ 645, now (after the split) it is at around $ 93. Undoubtedly, a much more affordable price.