Stock Dividend Accounting What Is

Stock Dividend Accounting What is a stock split? How is a stock split different from a stock dividend? A stock split is when a company decides to issue more shares to current shareholders, giving each shareholder additional shares for the same amount of money they initially paid. "After a split, the stock price will be reduced since the number of shares outstanding has increased" (What is a stock split, 2012, Investopedia).

To deliberately reduce the share price may seem like a strange decision on the part of the Board of Directors, but in some instances this may be a wise move. "A stock split is usually done by companies that have seen their share price increase to levels that are either too high or are beyond the price levels of similar companies in their sector.

The primary motive is to make shares seem more affordable to small investors even though the underlying value of the company has not changed" (What is a stock split, 2012, Investopedia). While the price initially decreases, the hope of the company is that splitting the stock will actually drive up stock prices. The less expensive the stock, the more people will want to buy it as a bargain, particularly if all other aspects of the company remain sound.

"A stock split generally occurs in the face of new highs for the stock. Thus, it's an event dripping with positive connotations and associations. it's makes bulls snort and roar to suddenly have 'twice as many shares' as they started with, for example" (Stock split, 2012, Fool FAQ).

When the price is lowered at a time when there is a great deal of positive buzz about the stock, more investors will want to buy it -- the deliberately plummeting price is regarded differently than a stock that is simply reducing in value due to market circumstances. A stock dividend, in contrast to a stock split, "does not involve cash. Rather, it is the distribution of more shares of the corporation's stock.

Perhaps a corporation does not want to part with its cash, but wants to give something to its stockholders. If the board of directors approves a 10% stock dividend, each stockholder will get an additional share for each 10 shares held. "A stock dividend does not involve cash. Rather, it is the distribution of more shares of the corporation's stock. Perhaps a corporation does not want to part with its cash, but wants to give something to its stockholders.

If the board of directors approves a 10% stock dividend, each stockholder will get an additional share for each 10 shares held" (Stock splits and stock dividends, 2012, Accounting Coach). It can be thus viewed as a kind of 'creative' way of rewarding shareholders and holding on to necessary cash. The company may be cash-poor because it wishes to invest more heavily in R&D, to engage in efforts to expand the company, or to deal with the costs of a merger, acquisition, or some other form of internal or external instability.

As with a stock split, however, the value of the corporation will decrease in value after since the company value has remained constant but there are more outstanding shares. It might be asked: how is a stock dividend, as opposed to cash, favorable for the investor?