Investors should be concerned about stockholders' equity in any company in which they invest in because equity affects how much a company can issue in dividends. Stock splits affect stockholders' equity, given that they increase your number of shares in a company. Savvy investors learn how stock splits work so that they can assess how the splits affect their portfolios.
As a stock grows in value, its price might become so high that some investors cannot afford it. Stock splits reduce the price of a stock by splitting a stock into multiple shares, for instance splitting each individual stock into two shares. When this happens the value of the stock is split as well. This means that the overall market capitalization -- the total value of all stocks -- of the company remains the same.
Stock Split Example
If you have a $50 stock that is split into two, you would end up with two $25 stocks. Assuming that there had been 10,000 shares of the $50 stock there would now be 20,000 shares of the $25 stock. The original market capitalization would be calculated by multiplying $50 by 10,000 to get $500,000. The market cap after he split would be calculated by multiplying $25 by $20,000 -- again giving a $500,000 market cap.
Stockholders' equity is the difference between a company's total assets and total liabilities. It is listed, alongside assets and liabilities, on a company's balance sheet. Stockholders' equity is essentially the profit from the business. It can either be paid out to investors through a dividend or reinvested in the company.
Split's Effect on Stockholders' Equity
When a stock splits, it has no effect on stockholders' equity. During a stock split, the company does not receive any additional money for the shares that are created. If a company simply issued new shares it would receive money for these, which would increase stockholders' equity. Similarly, stockholders' equity decreases if dividends are issued to shareholders. Stockholder equity can also be affected by net revenues and net losses. But stock splits will have no impact on stockholders' equity.
M. Scilly is a writer and editor who writes for various online publications, specializing in business and management. He has a fondness for travel and photography. In his free time he enjoys marathon training.