Stock dividends are when a company issues to existing shareholders additional shares of stock in proportion to current ownership. Stock dividends help reduce the retained earnings account. Next, a stock split results in the issuances of additional shares in proportion to current ownership and represents nothing of value to stockholders; they are generally used to lower the market price of a firm’s shares to make the common stock more affordable for the average investor. Last, reverse splits occurs usually happens when a company is struggling financially. A reverse split is when a company decreases instead of increases.
There are many reasons for stock dividends, stock splits, and reverse splits. An analysis of stock dividends is they help capitalize retained earnings. Even though stock dividends have no effect on benefiting corporations or their shareholders, companies like the idea that they are receiving the dividend. The many reasons for stock dividends is to induce the per share market decline in price. An example is when a company owns 100 percent of stock dividends on 50 million shares of common stock. The price per share on the market is ten dollars; it then will create one hundred million shares which generates a market value around five dollars. The reason in decreasing the per share market price is to help increase the stock marketability which helps make is more attractive potential investors which originates from stock splits. The last analysis of reverse splits as stated previously is when a company decreases instead of increasing its outstanding shares. An example of a reverse split is a 1-4 reverse stock split, if a company would have one hundred million shares and it was one dollar per share is would then become only twenty-fine million shares. This would then generate a share that would equal four dollars. Since the price per share increased and the total amount of shares decreased this helped generate a reserve stock split.