How does an enlarged share base affect share price?

Question

If a company has 100 million shares in circulation, each is trading at 5 dollars and has earnings per share at 25 cents, announces a 1 for 1 stock split (so there will be 200 million shares after the stock split), everything will be divided by half. So now there will be 200 million shares in circulation, each share trading at 2.50 dollars and has earnings per share at 12.5 cents.

Why do companies do a share split? What is the difference between the company having 100 million, or 200 million shares in circulation? Because if the company splits the shares, we have more shares but the share price and earnings per share etc.. will decrease by half. Are there any reasons to do a share split, apart from making the share price go down?

How does it affect the company's future stock price, now that it has 200 million shares in circulation?

Say 5 years from now, all else being equal, if the company has 100 million shares in circulation and the share price is $15 per share, from my point of logic the company's share price will be $7.50 if it had split the shares 5 years previously and has 200 million shares in circulation. Is that the case in real life situations? In general, would the share price tend to be $7.50, higher than $7.50 or lower than $7.50 if the company splits the shares/has a larger share base?

Answer 1

Most of the time when a stock splits to create more shares, it is done to bring the price per share down to a level that makes potential investors more comfortable. There are psychological reasons why some companies keep the price in the $30 to $60 range. Others like to have the price keep rising into the hundreds or thousands a share.

The split doesn't help current investors, with the possible exception that the news spurs interest in the stock which leads to a short term rise in prices; but it also doesn't hurt current investors.

When a reverse stock split is done, the purpose is for one of several reasons:

• The market requires that the price per share be above a specific level or they can't be listed.
• The feeling is that the price is too low and that some potential investors shy away from investing in it.
• They want to reduce the number of investors. The reverse split means that some small investors now own less than a share, so they are cashed out. If the number of investors are small enough they can act more like a privately help company.