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Definition Of A Stock Essay

1145 words - 5 pages

Definition of stock.
A stock (also referred to as share or equity) is a security issued by a company that represents a stake of the ownership rights in the assets of the company and a share of its profits after payments of corporate liabilities and obligations. Stocks are sold and bought on an exchange. Corporations issue stock in order to raise capital to finance their operations. A stockholder is an owner of a company. A stockholder is an owner of a company’s property, which is held in the name of the company on behalf of its stockholders. Other securities such as bonds and notes differ from stocks, since they are corporate obligations and do not represent an ownership interest in the ...view middle of the document...

If the market price of a company’s stock on the stock market rises sharply, management will not split stock if they believe there is a significant probability that the prices will fall back into an affordable range. Management will split the stock if they have confidence in the continuous appreciation of the shares.
When a company’s stock splits, the outstanding shares increase and the price per share decrease. For example, if a company has Four million shares issued and their trading at GHȼ50 per share, then the company’s capital value is Two hundred million Ghana cedis (GHȼ200,000,000.00). When the company offers a 4-for-1 split, the outstanding shares will increase to Sixteen million shares (that is, Four million shares multiplied by 4) and the price per share will reduce to GHȼ12.50 (GHȼ50.00 per share divided by 4). It’s market capital value will remain the same at GHȼ200,000,000.00 (Sixteen million shares at GHȼ12.50 per share). The investment amount for an existing investor will remain the same, but now own quadruple as many shares, and each is worth a quarter as it was before the split. An easy way to determine the new stock price is to divide the old stock price by the split ratio.

Pre-split Post-split
2-for-1
# of shares
Share price
Market cap
10M
GHȼ10
GHȼ100M
20M
GHȼ5
GHȼ100M
3-for-2
# of shares
Share price
Market cap
10M
GHȼ10
GHȼ100M
15M
GHȼ6.66
GHȼ100M
Reverse stock split
1-for-10
# of shares
Share price
Market cap
10M
GHȼ1
GHȼ10M
1M
GHȼ10
10M

Table illustration of the effects of stock splits on the number of shares, Share price, and market cap.

REVERSE STOCK SPLITS
According to the U.S Securities and Exchange Commission “A reverse stock split reduces the number of shares and increases the share price proportionately”. Companies usually split their stock when they think the price of the stock is too low to attract investors. A reverse stock split will have no effect on the value of a company. For example, if a company announces a 1-for-10 reverse split, for every 10,000 shares with a current market price of GHȼ20.00 per share, the number of shares will now be 1,000 shares and...

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