Stock Splits Explained

A stock split is a corporate action in which existing shares are divided in to multiple shares by the company. The dollar value of the shares is still the same even though the number of outstanding shares is still the same because the split did not add any real value.

The most common split ratios are 2-for-1 or 3-for-1. This means that the stockholder will have two or three shares for every share held prior to the split.

Why does this happen?

There are multiple reasons why a company may engage in a stock split. When the price of a stock gets to a high valuation, some investors may feel that the price is too high for them to buy the stock. Splitting the stock can make the price of shares go down to a more manageable level. Studies have shown that companies that split their shares have prices go up an average of 7 percent in the first year after the split.

How does this happen?

It is generally a rare occurrence for stocks to split. Stock splits are at the judgement of the company and does not happen at times decided beforehand. Stocks split when a company decides to divide existing shares into more than one share. It is made sure that the value of the shares is altered so that each investor retains the same dollar value in shares before the split, even though the number of shares he owns has increased.

Reverse Stock Split

Stocks have the possibility to undergo a reverse stock split. A reverse stock split is when a company cuts down the number of outstanding shares. Just like how it is with a normal stock split, stocks retain the same dollar value it had prior to the reduction.