Your best friends are in a spirited conversation about his spin off stock and her pending stock split. She insists her stock split is the better investment. You wonder, what is a stock spin off and what is the difference between a spin off and a stock split? Turning to you, they ask your opinion. Read on to nail your answer.

What is the Difference between a Spin Off and a Stock Split?

The difference between a spin off and a stock split is a spin off creates a new standalone company and a stock split increases the number of shares of an existing company. Tell your friends this:

Spin Off

  •  A spin off is the separation or divesting of a division or subsidiary of a larger company. The separated portion is now an independently operated entity. The new firm has its own board, management, assets, liabilities, and employees, and it may or may not be publicly traded.
  • The parent firm, the company detaching the subsidiary, performs this corporate action to allow the new entity to concentrate on its core business in pursuit of its specific growth initiatives to unlock undiscovered shareholder value.
  •  Parent company shareholders receive shares in the new spin off in proportion to their current parent share ownership. The original parent shares may fluctuate in value depending on market sentiment concerning the loss of spin off revenue, parent firm assets, and the prospects of both firms.

What is the difference between a spin off and a stock split? A spin off and a stock spilt are corporate actions that serve different purposes and have differing investor implications.

Stock Split

  •  A stock split increases the number of outstanding shares of an existing company. If the firm announces a 2-for-1 (2:1) split, then each company shareholder receives an additional share for each share currently owned.
  •   Stock splits increase the stock’s liquidity and make the shares more affordable. Share liquidity rises as the number of outstanding shares increases and the stock becomes more affordable because the share price is proportionally decreased.
  • The existing shareholder ownership stake and the firm’s market value remain the same. However, a lower share price and increased liquidity may attract additional investors, potentially driving the stock price higher over time.

What is the difference between a spin off and a stock split? The difference is an investor can potentially profit from the newly issued spin off shares or she can benefit for the market’s reaction to the lower price of her increased number of existing shares.

Is a Spin Off Good for Shareholders?

Yes, a spin off’s good for shareholders, under certain conditions:

  • Value Recognition – Spinning off a division often unlocks shareholder value previously unrecognized in the shadows of the parent company.
  • Renewed Focus – The newly formed spin off is free to focus on its vision, mission, and growth opportunities. This unrestrained, concentrated pursuit can lead to quicker market responsiveness, heightened investor interest, and additional investment capital.
  •  Capital Allocation Efficiency – The streamlined decision process of a spin off leads to more efficient capital allocation and a tailor-made capital structure capable of delivering higher shareholder returns.
  • Tax Efficiency – Spin off transactions can be structured for favorable tax treatment for parent company shareholders and spin off shareholders, as well.

What is the difference between a spin off and a stock split? A spin off creates a new company independent of its parent firm and it may be traded publicly.  Stock splits increase the outstanding shares of an existing company, which increases share liquidity and proportionally lowers the stock price. Both can be profitable under the right market conditions.

Read next: Is a Spin-off the Same as a Merger?

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