5 min read•Last Updated on July 30, 2024
Stock splits and stock dividends are key tools companies use to manage their shares. While they don't change a company's value, they can impact share price and investor perception. These strategies can make stocks more affordable, boost liquidity, and signal confidence in future growth.
Understanding the mechanics and effects of stock splits and dividends is crucial for grasping corporate finance. These actions redistribute equity, affect financial statements, and can influence market behavior. Knowing the differences helps investors interpret company decisions and market reactions.
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Authorized shares refer to the maximum number of shares a corporation is allowed to issue to shareholders as specified in its articles of incorporation. This number can have significant implications for corporate structure, capital raising, and stockholder rights. It's important to note that just because a company has authorized shares does not mean they have all been issued; some may remain unissued, which can be used for future financing or employee stock options.
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Authorized shares refer to the maximum number of shares a corporation is allowed to issue to shareholders as specified in its articles of incorporation. This number can have significant implications for corporate structure, capital raising, and stockholder rights. It's important to note that just because a company has authorized shares does not mean they have all been issued; some may remain unissued, which can be used for future financing or employee stock options.
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Par value is the nominal or face value of a security, typically associated with bonds and stocks. It represents the minimum price at which a share of stock can be issued and is crucial in understanding the initial financial structure of a company, including its common and preferred stock characteristics, stock issuance processes, and effects during stock splits and dividends.
Market Value: The current price at which an asset or security can be bought or sold in the market, often differing from par value.
Dividend: A portion of a company's earnings distributed to shareholders, which may be influenced by par value when calculating dividend payments.
Equity Financing: The process of raising capital through the sale of shares, where par value plays a role in determining share pricing and equity distribution.
A stock split is a corporate action in which a company divides its existing shares into multiple new shares to increase the number of shares outstanding while maintaining the same overall market capitalization. This process adjusts the share price downward, making the stock more affordable for a wider range of investors. A stock split often signals that a company is performing well and wants to make its shares more liquid and accessible.
Shareholder Equity: The residual interest in the assets of a company after deducting liabilities, representing the ownership stake held by shareholders.
Market Capitalization: The total market value of a company's outstanding shares, calculated by multiplying the share price by the total number of outstanding shares.
Stock Dividend: A distribution of additional shares to existing shareholders instead of cash, which increases the total number of shares while reducing the value of each share.
A stock dividend is a distribution of additional shares of a company’s stock to its shareholders, proportional to their existing holdings. Unlike cash dividends, which provide immediate income, stock dividends increase the number of shares held by investors while maintaining the overall value of their investment, thus diluting the earnings per share but not affecting the total equity. This practice is often used by companies to conserve cash while rewarding shareholders.
Cash Dividend: A cash dividend is a payment made by a corporation to its shareholders in cash, representing a portion of the company's earnings.
Earnings Per Share (EPS): Earnings per share is a financial metric that indicates the portion of a company's profit allocated to each outstanding share of common stock.
Stock Split: A stock split is an action taken by a company to divide its existing shares into multiple new shares, increasing the total number of shares outstanding while reducing the price per share.
Retained earnings refer to the cumulative amount of net income that a company has retained, rather than distributed as dividends to shareholders. This figure represents the portion of a company's profits that is reinvested in the business for growth, debt repayment, or other operational needs, and it is a crucial component of equity on the balance sheet.
Dividends: Dividends are payments made by a corporation to its shareholders, typically derived from profits. They can be in cash or additional shares and represent a return on investment for the shareholders.
Stockholders' Equity: Stockholders' equity is the residual interest in the assets of a company after deducting liabilities. It encompasses retained earnings, paid-in capital, and other equity components.
Appropriated Retained Earnings: Appropriated retained earnings are portions of retained earnings that are set aside for specific purposes, such as future investments or debt obligations, indicating that those funds are not available for dividends.
The declaration date is the specific date on which a company's board of directors officially announces a dividend payment to its shareholders. This announcement includes details such as the amount of the dividend and the dates for the record and payment. It marks the moment when a liability is recognized on the company’s balance sheet, as it obligates the company to pay dividends to shareholders.
ex-dividend date: The ex-dividend date is the first day on which a stock trades without the right to receive the upcoming dividend, typically set one business day before the record date.
record date: The record date is the cut-off date established by a company in order to determine which shareholders are eligible to receive the declared dividend.
dividend payout ratio: The dividend payout ratio is a financial metric that shows the percentage of earnings distributed to shareholders as dividends, indicating how much profit is being returned to investors.