The Stock Split Explained

A stock split is an official corporate action and occurs when a company decides to split its current shares into more shares to increase its share's liquidity. A company will do this to increase the number of outstanding shares in the market.

Stock Split Explained

When a split occurs, the dollar value of the shares stays the same, though the price changes. When it splits, it doesn't add any real value to the stock.

Most splits occur in the forward direction, meaning for every share you own, you may get 2, 3, or a lot more shares. The price will lower respectively to where it equals where the original price per share was. So, if a stock price is $1,000.00 and it splits 2:1, the price will drop to $500.00 per share, but you will have 2 shares instead of 1.

There are reverse stock splits for the company to decrease the number of outstanding shares and to increase the price per share. This may be done by the company to avoid being removed from the exchange due to price dropping too low.

Why Do Companies Decide on Stock Splits?

There are many reasons why a company may want to decide on splitting stocks. The main one is psychological. Some investors may feel like a stock price is too high and doesn't want to pay that much for a share. Splitting to bring the price lower helps those investors start buying shares again.

It's also used by the company to increase a stock's number of outstanding shares (shares available to buy), otherwise known as liquidity.

Company Stock Splits

There are no immediate financial benefits of splitting a stock for the company.

Some people buy shares of stock when they hear about forward splits if it's a strong company with more growth potential. Take for instance Google. They climbed to a very high number, over $1,100.00 in fact with a price of around $598.00 per share. It was a 2 for 1 split in March of 2014 and caused a lot of controversy due to the way they did it. Now the stock is over $1,100.00 again and has had a performance of over 100% since the split.

Not all splits have the same outcome. Sometimes the split backfires and the lowered share price is perceived as lost value and people stop investing in it. The price then drops on the lower demand.

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