Splits, buybacks, IPOs and other company events
Companies do things that change the number of shares or their price without changing what your stake is worth. Knowing how to read them avoids confusion.
Every now and then you'll see a stock "fell 75%" overnight with nothing bad having happened, or a company announcing it will "buy back" its shares. These are corporate actions. Some don't change what your investment is worth; others do.
Stock split
In a split, the company divides each share into several. It doesn't change the company's value or your investment's: you just have more shares, each one cheaper. Companies do it to make the per-share price more accessible.
A reverse split is the opposite: it combines several shares into one. It's usually done when the price is very low, sometimes to meet an exchange's minimum price, and it's often a sign the company has had problems.
Share buybacks
In a buyback, the company uses its money to buy its own shares on the market. With fewer shares outstanding, each one represents a slightly larger part of the company and earnings per share rise. It's another way to return money to shareholders, similar to a dividend.
| Dividend | Buyback | |
|---|---|---|
| How it reaches you | Money in your account | Your stake in the company grows |
| Taxes | You pay when you receive it | You pay when you sell (if you gained) |
| Flexibility for the company | Cutting it is usually punished | Can be paused with less noise |
Initial public offering (IPO)
It's when a company sells shares to the public for the first time. There's a lot of attention and sometimes the price jumps on the first day. But there are risks too: a short history as a public company, a lot of emotion in the price and, months later, the end of the period in which the original owners couldn't sell (lock-up), which can pressure the price.
Issuing new shares (dilution)
If a company issues new shares to raise money, your stake is diluted: you have the same shares, but of a pie split into more pieces. It also happens gradually when companies pay employees in stock. Constant, high dilution reduces what each shareholder earns.
Mergers and acquisitions
When one company buys another, it usually pays a premium over the market price, so the target's stock rises. The buyer's may fall if the market thinks it overpaid. If you're paid in the buyer's shares instead of cash, you become a shareholder of it.
Spin-offs
A company separates one of its divisions and creates a new company; shareholders receive shares of the new one. The total value is usually similar at first: what was one company is now two.
Test what you learned
1. You own 5 shares at $300 and there's a 3-for-1 split. What do you have afterwards?
- 5 shares at $100
- 15 shares at $100
- 15 shares at $300
Show the answer
15 shares at $100. You triple the shares and the price is divided by 3: still $1,500.
2. What does a share buyback do?
- Increases the number of shares
- The company buys its own shares and fewer remain
- Pays an extra dividend
Show the answer
The company buys its own shares and fewer remain. With fewer shares, each one is worth a larger part of the company.
3. What is dilution?
- Your stake in the company shrinks because new shares are issued
- The stock pays a smaller dividend
- The exchange closes early
Show the answer
Your stake in the company shrinks because new shares are issued. The pie is split into more pieces.
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Everything in this section is educational: it explains how investing works, it doesn't tell you what to buy.