GameStop’s (NYSE:GME) gained more than 16% in after-hours trading Thursday after the retailer announced it would look to implement “a stock split in the form of a stock dividend.”
Breaking Down Stock Splits
Stock splits occur when companies increase their total number of shares outstanding, but the overall value of all their shares remains identical. As a result, splits give each shareholder more shares, but they also proportionally lower the value of each share.
With its stock split, GameStop intends to raise its total number of shares to 1 billion from 300 million. We don’t yet know at what ratio it intends to split its stock, but each shareholder will end up left with more shares. Importantly, the total value of each stockholder’s shares will not directly increase due to the split.
Investors should also note that GameStop’s board has not yet fully approved the plan.
What Is a Stock Split in the Form of a Stock Dividend?
According to CNBC, “A stock dividend is a dividend paid to shareholders in the form of additional company shares instead of cash.” Therefore, it appears that GameStop is labelling the extra shares that the owners of GME stock will receive through its likely upcoming stock split as a “stock dividend.”
For the owners of the shares, the bad news is that this “stock dividend” will not inherently add any value to their holdings.
The good news is that, by undergoing a stock split, a company greatly reduces the per-share price of its stock. Consequently, the stock becomes much more attractive to retail investors who view it as more affordable because of its lower price. Increased buying of the shares by these retail investors tends to raise the stock price.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.