Renesola - Chinese Solar Panel/Silicon Recycling

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Stock split refers to a corporate action that increases the number of shares in a public company. The price of the shares are adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included.

For example, a company has 100 shares of stock each with a price of $50. The market capitalization is 100 × $50 = $5000. The company splits its stock "2-for-1". There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share has been adjusted to $25. The market capitalization is 200 × $25 = $5000, the same as before the split.

Ratios of 2-for-1, 3-for-1, and 3-for-2 splits are the most common but any ratio is possible. Splits of 4-for-3, 5-for-2, and 5-for-4 are not unheard of. Sometimes investors will receive cash payments in lieu of fractional shares.

It is often claimed that stock splits, in and of themselves, lead to higher stock prices; however, research does not bear this out. What is true is that stock splits are usually initiated after a large run up in share price. Momentum investing would suggest that such a trend would continue regardless of the stock split.

Other effects could be psychological. If many investors think that a stock split will result in an increased share price and therefore purchase the stock, the share price will tend to increase. Others contend that the management of a company, by initiating a stock split, is implicitly conveying its confidence in the future prospects of the company.