Stock split: What you need to know as an investor

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Listed companies have the option of reacting when share prices rise sharply. In this case, a stock split is carried out. While this measure usually brings advantages for joint-stock companies, it can be disadvantageous for investors. This guide provides you with all the important information on the stock split and what details are important.

What is a stock split?

A stock split is a measure taken by public limited companies in which the shares are divided in a certain ratio. The existing shares are exchanged for shares with a lower nominal value.

However, the larger number of shares does not change the stock market value of the issuing company - only the issued number of securities changes. In English, the stock split is called a "forward stock split".

Reasons for the stock split

When a company is successfully listed on the stock exchange, its share price rises. At the same time, the high price value of the share becomes increasingly unattractive for a broader group of investors, as they have to raise significantly more capital to invest in the company.

The share split reduces the nominal value of the shares and the securities become visually cheaper for investors. Companies hope that this measure will lead to greater demand for their shares and thus to a rising share price and a growing stock market value. In the medium to long term, a share split can thus be a means of increasing a company's share price, even if the nominal value is initially reduced.

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Requirements and timing

Whether or not a share split may be carried out must be decided by the shareholders' general meeting with a simple majority. A share split is not possible without the resolution of the general meeting.

What can happen without a share split

If a company avoids a share split, without a capital increase it can lead to the share becoming increasingly unattractive to a broad class of investors in As a result of falling demand, the company's share value would decline in the long run. An impressive example of such a share that has never been split is the security of the holding company of the major American investor Warren Buffet. The market value per share was at times more than 200,000 euros.

Carrying out the share split

Every share split must first be approved at the general meeting of the public limited company. A simple majority is sufficient for this. After the resolution, the old shares are exchanged for the new shares in a certain ratio.

In the case of no-par shares, an amendment to the articles of association is made for the split, as each shareholder has a fixed share in the company, with no par value. In the case of par value shares, the share split is implemented by withdrawing the old shares and issuing the new shares with the same WKN and ISIN. By using so-called "global shares", in which many par value shares are bundled, the change in a share split is even easier to implement and requires less administration.

Share value does not change for the time being

In the case of a share split, only the number of shares changes; the equity capital of the AG and the share value of the investor do not change for the time being. For this reason, a stock split is usually referred to as a "psychological" effect and not as a direct economic effect.