What Is a Stock Split

A stock split occurs when a company decides to issue new shares and distribute it to its current shareholders. It is a decision by its board of directors.

The most common stock split is a 2 for 1 split. When this happens, the wholesaler will now own twice as many shares as before the split, but at half the price. The total value of your stock does not change. For example, if you owned 100 shares before the split, and the price was $ 50 a share, after the split you would own 200 shares at $ 25 a share. After the split the shareholder owns the exact same percentage of the company before the split, only the number or shares and the share price changed.

While a 2 for 1 split is the most common, companies also distribute 3 for 1 Split, 3 for 2 splits, 5 for 1 splits, etc.

Why should a company split its stock?

Companies will split their stock when they feel that the stock price has risen to the point that it no longer will be considered affordable for many investors. Since most stock transactions are in round lots (lots of 100 shares), the total cost of 100 shares may be out of reach for some investors. When a stock price hits $ 100 a share, for example, shows that many investors consider it to be too expensive. If the price per share was reduced it would be more affordable. The effect of more people to buy shares will hopefully lead to a price gain.

What effect does a stock split has on the price?

When a company splits the stock it sends a message that the company has been profitable and will probably continue to flourish. Companies tend to announce their upcoming stock split some time in advance. Many investors and traders search for these companies and consider them prime candidates for a further price increase.

In theory a stock split should not influence the value of the stock should be a neutral event. The only thing that has changed is the stock price and number of shares. When you do the math you still have the same value, and the same percentage of ownership in the company. In practice, however, as companies split their stock, usually see price when split is announced or after the split actually takes place. The company is aware of this and are eager to see the share price rise.

Reverse Split

Sometimes a company will issue a reverse split. When this happens shareholder will have fewer shares at higher prices. For example, a typical reverse split a 1-10 split. For example, a company if there has been trading at $ 1 a share, and you have 100 shares after a 1 to 10 split you will have 10 shares at $ 10 share. A company may conduct a reverse split when their share price has fallen to very low levels, and they want to increase the stock price to seem more respectable to potential investors. Moreover, some exchanges de-list a stock when the price falls below a certain level in 30 days.