Split
Companies carry out share splits if they regard
the price of their own shares as too high - sometimes so high that few can afford the
shares. The share capital
does not change. However, the number of shares does change; it
is "split" - usually in a two to one ratio. Anyone who owned 100 shares
in a company before the split has 200 afterwards. The value of the shares is halved, but in return
the number of shares doubles. Their total value is therefore unchanged. However, a split often has
a positive side-effect; after the split the share price often goes up, as the shares can now be
acquired more cheaply.
Capital increase
Companies often increase their
share capital in order to obtain the capital
they need, for example to build up a new line of business or to finance the takeover of a competitor.
They do so by issuing new shares and
thereby increasing their share capital. However, this reduces the ownership stake of the
old shares in the share capital, i.e. the shares account for a lower proportion of the company's assets.
In order to ensure that the existing shareholders are not disadvantaged, they have a pre-emptive right
to buy a certain number of shares. These pre-emptive rightscan be traded on the stock
exchange, usually up to a certain date. The pre-emptive rights are usually calibrated in such a way that
the ownership stake of a shareholder in the
share capital is the same as before the capital increase.
Buyback
Public limited companies sometimes
buy back their own shares. There can be
many reasons for a share buyback; some companies want to invest surplus capital, others need the buyback
for bonus schemes or they may want to prevent attempted takeovers, or for other reasons. The share
price normally rises in the short term as a result of share buybacks. Share buybacks can be seen as
part of strategic financial policy, particularly equity and dividend policy. See also
Types of shares, Treasury shares.
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