Stock Split Definition: Know what is a stock split all about with examples and memorandum announced by a company.
Do you know what stock splitting is and when it is being done? A reader of InvestmentTotal.com asked question about stock splitting via email, and I am glad to answer his question today. Let us know this time, the definition of stock split by using some references like accounting books, other financial websites and stocks experts.
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Stock Split Definition
A corporation may split its stock by increasing the number of outstanding shares of common stock and reducing the par or stated value per share in proportion. The purpose of the split is to reduce substantially the market price of the common stock, with the intent of making the stock more attractive to investors.
Example of Stock Splitting
Example: ABCXYZ Corporation has outstanding 1,000,000 shares of P10 par value stock. The market price is P90 per share. ABCXYZ Corporation now reduces the par value from P10 to P5 per share and increases the number of shares from 1,000,000 to 2,000,000.
This action would be called as 2 for 1 stock split. A stockholder who owned 100 shares of the stock before the split would own 200 shares after the split. Since the number of outstanding shares has been doubled without any change in total assets or total stockholders’ equity, the market price of the stock should drop from P90 to approximately P45 a share.
Note: A stock split does not change the balance of any ledger account; consequently, the transaction may be recorded merely by a memorandum entry in the general journal and in the Common Stock account. Example memorandum example ABCXYZ Corporation :
Example Stock Split Memorandum
Oct. 2014 Memorandum: Issued additional 1 million shares of common stock in a 2 for 1 stock split. Par value reduced from P10 per share to P5 per share.
Reference: Accounting: The Basis for Business Decisions (8th Edition), by Robert F. Meigs (San Diego University), Walter B. Meigs (University of Southern California), McGraw-Hill Publishing Company, page 568-569
Now you know the definition of stock split and why some corporations are making stock splitting; to make the stock/s more attractive to investors. To learn other financial and accounting terms especially in investing in stocks, mutual funds and unit investment trust funds, please always visit InvestmentTotal.com for other terms to be discuss soon.
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