Stock Issues and Retained Earnings

• The only times a company makes money off the sale of its stock is when it first issues its stock in an Initial Public Offering, or IPO, or if it issues a secondary offering, sometimes referred to a seasoned equity offering. IPOs and secondary offerings increase retained earnings. Once a company sells its stock to investors, ownership of the stock transfers to the investors. The company no longer has any claim to the proceeds made from the subsequent sale of its stock.
  
  

Increase in Shares Outstanding

• Though it seems counterintuitive, an increase in shares outstanding after a forward split does not increase retained earnings. The reason for the increase in shares outstanding is the split itself. If a stock splits 5:1 (five-for-one) and you own one share before the split, when the split is complete, the company gives you four additional shares. So, after the split you own five shares total. Even though you have more shares than before, the price per share decreases proportionately with the stock split ratio.
  
  

No Change in Retained Earnings

• Because the price per share decreases proportionately with the stock split ratio, there is no change in retained earnings after a split. Using the 5:1 split example, say the stock you owned had a price per share of $100. Since one share becomes five after the split, you decrease the $100 price per share by a factor of five. The math to figure out per share price is $100 / 5 = $20. The price per share after the split decreases to $20 per share
  
  

Decrease in Shares Outstanding

• A reverse stock split accomplishes the exact opposite of a forward stock split — it reduces the number of total shares outstanding and increases the price per share. Though it seems that a reverse split decreases retained earnings because the company is effectively buying back shares, it doesn’t. This is because the share price increases proportionately with the reverse split ratio. For example, say you own five shares at $10 per share and the company announces a 1:5 reverse split. After the reverse split, you own one share at a price per share of $50.