Stock splits exist in two forms. The forward split is the most common and is similar to a stock dividend in that you receive more stock, based on your current holdings. It is used to increase the number of shares outstanding, to lower the price of the stock and to reward shareholders. Often, the stock price increases back to pre-split levels, giving the shareholders a nice profit. The reverse split takes shares away from you, but the dollar price increases. A reverse split is used to decrease the number of shares outstanding and to increase the price per share, often in preparation for a move from over-the-counter trading to a higher exchange.
Learn the terminology. A stock split will be described as "2:1," which is read "two-for-one," meaning you will receive an additional share so you end up with two shares instead of one. A reverse split will be shown as "1:2," read "one-for-two," meaning you will be re-issued a new certificate for half the original number of shares, and the old certificate will be canceled.
Note the ex-dividend date and the date of record. To participate in the split, you must own the stock on the date of record, which means you must have bought the stock by or on the ex-dividend date. If you sell on the ex-dividend date, the person who buys your shares buys them with the additional stock. If you buy one day late, you pay a lower price, but you don't receive the stock split. In a reverse split, if you buy stock on the ex-dividend date you will pay a higher price for fewer shares, because the reverse split consolidated shares, so the price goes up.
Calculate a forward split by multiplying the original number of shares by the new number of shares. If it is a 2:1 split, your arithmetic will be 2 x 1 = 2 shares total. If the original stock was trading at $10 per share before the split, it will now be $5 per share.
Calculate a reverse split by dividing the number of original shares into the number of new shares: 1 new share divided by 2 original shares = .5, then multiply your total number of original shares to arrive at the new amount. If you own 100 shares, the arithmetic would be 100 shares x .5 = 50 new shares. The total value of your shares stays the same, but the per share price doubles.
Call your broker or the transfer agent if you have any questions. Your broker or the investor relations manager at the underlying company can tell you how to contact the transfer agent for the stock.
- If you hold your stock in your brokerage account, the brokerage house will handle all the paperwork associated with either a stock split or a reverse split. You will simply see a change in your holdings.
- If you hold your own certificates and see a significant change in the price of your stock, it might have gone through a forward or reverse split. If the stock price is much higher, before you get excited and sell it to take profits, check with your broker to make sure it hasn't gone through a reverse split, or you may accidentally sell more shares than you own and be forced to buy more stock at the market price to cover the extra shares.
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