In theory, a stock split shouldn’t change the value of a stock. Shareholders don’t get any richer; they just have more shares to look after. It’s no different than exchanging a dime for two nickels. Then what’s the point?
Stock splitting is a measure typically taken to attract the average retail investor. By splitting the stock, the price becomes more attractive to the average investor as oppose to when the share price was at a higher price. The reasoning is that more people will want to buy a stock at $25 than $50. Also, it’s common to see share price to go up after a split when investors buy the stock at a lower price.
Another reason why a company would want to declare a stock split is to make more shares available to trade in the market. Having more shares in the market could drastically alter the price. Institutions in particular prefer to these types of companies as oppose to lower-volume stocks. The more shares outstanding the less impact there is on the price of the stock as institutions buy and sell.
There are some who does not see any value in stock splits but has research has shown that stock splits frequently have a positive effect on share prices. The goal for trading stock splits is to capture a portion of the positive price movement of the stock that occurs during the split.
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