Ask Colin

If a share price is very volatile and has low liquidity, would a share split be a possible solution?

Yes it would. Share splits seem to have two main objectives:

1. To reduce the price of the shares to the range that most investors feel comfortable with in our market. Once prices go over about $10, a lot of investors think they are too expensive, even when they are clearly under-valued on fundamental measures. It is a purely psychological issue or effect.

2. To increase the number of shares available for trading. It seems that people are more prepared to sell part of a large number of shares, say 10,000, but not a smaller number of shares, say 800, even though the actual value is the same. Again it is purely a psychological effect. This increases the liquidity. Liquidity tends also to reduce volatility, because there are more buyers and sellers to aid price discovery.

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