Question

How can a stock split affect the long-term profits of an investor?

Answer 1

Stock split- It is a corporate action in which company issues new shares to existing shareholders in proportion to their current holdings. Company divides its existing shares into number of shares to maintain the liquidity. Market capitalization remains same because number of shares increase but per share price decrease. Value remains same

Example: Apple Inc. share price is $200, company can come with stock split 1:2, investor who has one share of Apple, will have two now and price of per share will be just half of the current price.

Impact of stock split on long term profits- Investors get more number of shares in stock split, if they hold higher number of shares for long term (5 years or so), they get high capital appreciation, their holding period return increases and they get higher dividend because dividend is given on per share basis and if investor holds many number of shares, dividend amount will also increase.