Stock Split Explained

A stock split is when every share is exchanged for a different number of shares, usually a larger number of shares. Most common are 2 for 1 stock splits. In this case, for every share the shareholder has, that shareholder will get two shares. But don’t get too excited about this – it’s not free money – the price is also adjusted accordingly so as to have the same value as the original single share. For example, if you have 100 shares of Apple that are trading at $100/share, and there is a 2 for 1 stock split, you will end up with 200 shares of Apple trading at $50/share.

A company might split its stock so that the share price is more accessible to smaller investors, or to those who buy through special individual share purchase programs. This also creates greater stock liquidity because there are more shares, and average daily volume of share trading will increase.

There are companies who are not particularly inclined to split their stock price and prefer to maintain a high stock price. Those companies view a higher price as attracting a higher quality of shareholder who is less likely to buy and sell the shares and thus result in greater stock price stability over time. A higher share price might also be looked at as a certain level of prestige. But in reality, the share price is relatively meaningless in and of itself and it is the total market capitalization that should be used to compare the relative value of different companies.

A stock split can take many forms. For example, there are 4 for 3 stock splits, where every three shares are exchanged for four. There are even reverse stock splits, where a larger number of shares are exchanged for a smaller number of shares. For example, a reverse split of 1 for 4 shares on a $1 stock would result in one quarter the number of shares at $4/share. Generally a company will do a reverse stock split if the share price falls to a very low price which no longer meets exchange requirements or is perceived as having less appeal to investors.


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