Understanding Stock Splits: What Investors Need to Know

What is a Stock Split?

A stock split is a corporate action where a company divides its existing shares into multiple shares. This increases the number of shares while keeping the overall market value the same. For example, in a 2-for-1 split, each shareholder gets two shares for every one share they own.

Stock splits are often done to make shares more affordable for investors. When a company's stock price becomes too high, it can deter new investors from buying shares. By splitting the stock, the company makes it more accessible.

shares increases, and the price per share decreases. This type of split is common and aims to make shares more affordable. For instance, in a 3-for-1 split, a shareholder with 100 shares will now have 300 shares, but each share will be worth one-third of the original price.

Reverse Stock Split

A reverse stock split reduces the number of shares but increases the price per share. Companies usually do this to meet stock exchange listing requirements. For example, in a 1-for-5 reverse split, a shareholder with 500 shares will now have 100 shares, but each share will be worth five times the original price.

Another reason is to make the stock more appealing to small investors. A lower price per share can attract those who might not be able to afford higher-priced shares. This broadens the investor base.

How Do Stock Splits Affect Investors?

Stock splits do not change the overall value of your investment. If you owned 100 shares worth $50 each before a 2-for-1 split, you would own 200 shares worth $25 each after the split. The total value remains $5,000.

However, stock splits can have psychological effects. Investors might perceive the stock as more affordable and buy more shares. This can sometimes drive up the stock price.