Why is a stock split not positive or negative for an investor’s return on a stock?

Expert Solution

Stock split is neither positive or negative for stock holders return as the total wealth of the stock holders remain intact both before and after the split.

For example = suppose a company has 100 stock outstanding and is trading at a price of =10

Hence wealth of shareholder =100*10=1000

Now if the company announce 1:1 split, which means you will get one stock for one stock held

Hence new number of shares after the split =2*100=200

After the split the price of the stock will be halved that is =10/2=5

Hence the wealth of shareholders after split =200*5=1000

Hence the split neither increases not decrease the shareholders return

The benefit of stock split is it reduces the price of the stock hence making it more liquid as people will who are interested to invest in small amount can easily buy or sell it.

jeff jeffy answered 2 years ago

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