Stock Split


DEFINITION of 'Stock Split'

A corporate action in which a company divides its existing shares into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because the split did not add any real value. The most common split ratios are 2-for-1 or 3-for-1, which means that the stockholder will have two or three shares for every share held earlier.
Also known as a "forward stock split."

In the U.K., a stock split is referred to as a "scrip issue," "bonus issue," "capitalization issue" or "free issue."


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For example, assume that XYZ Corp. has 20 million shares outstanding and the shares are trading at $100, which would give it a $2 billion market capitalization. The company’s board of directors decides to split the stock 2-for-1. Right after the split takes effect, the number of shares outstanding would double to 40 million, while the share price would be $50, leaving the market cap unchanged at $2 billion.

Why do companies go through the hassle and expense of a stock split? For a couple of very good reasons:

First, a split is usually undertaken when the stock price is quite high, making it pricey for investors to acquire a standard board lot of 100 shares. If XYZ Corp.'s shares were worth $100 each, an investor would need to purchase $10,000 to own 100 shares. If each share was worth $50, the investor would only need to pay $5,000 to own 100 shares.

Second, the higher number of shares outstanding can result in greater liquidity for the stock, which facilitates trading and may narrow the bid-ask spread.

While a split in theory should have no effect on a stock's price, it often results in renewed investor interest, which can have a positive impact on the stock price. While this effect can be temporary, the fact remains that stock splits by blue chip companies are a great way for the average investor to accumulate an increasing number of shares in these companies. Many of the best companies routinely exceed the price level at which they had previously split their stock, causing them to undergo a stock split yet again. Wal-Mart, for instance, has split its shares as many as 11 times on a 2-for-1 basis from the time it went public in October 1970 to March 1999. An investor who had 100 shares at Wal-Mart’s IPO would have seen that little stake grow to 204,800 shares over the next 30 years.

Want to know more? Read Understanding Stock Splits.

  1. Reverse Stock Split

    A corporate action in which a company reduces the total number ...
  2. Reverse/Forward Stock Split

    A stock split strategy that includes the use of a reverse stock ...
  3. Split-Off

    A means of reorganizing an existing corporate structure in which ...
  4. Scrip

    1. A written document that acknowledges a debt. 2. A temporary ...
  5. Bid-Ask Spread

    The amount by which the ask price exceeds the bid. This is essentially ...
  6. Board Lot

    A standardized number of shares defined by a stock exchange as ...
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    Dividends paid in cash affect a company's balance sheet by decreasing the company's cash account on the asset side and decreasing ... Read Full Answer >>
  2. What is a stock split? Why do stocks split?

    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Full Answer >>
  3. How do corporate actions affect floating stock?

    Corporate actions, defined as a company's actions that affect the amount of outstanding company stock shares, can either ... Read Full Answer >>
  4. How and why does a stock split?

    Stock generally do not split very often. Stock splits are at the discretion of the company and do not occur at predetermined ... Read Full Answer >>
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    The difference between Google's GOOG and GOOGL stock tickers is that GOOG shares have no voting rights while GOOGL shares ... Read Full Answer >>
  6. Do stock splits and stock dividends affect stockholder equity?

    Stockholders' equity represents the capital portion of a company's balance sheet. The stockholders' equity can be calculated ... Read Full Answer >>
  7. What can shareholders vote on?

    Common stock shareholders in a publicly traded company have certain rights pertaining to their equity investment, and among ... Read Full Answer >>
  8. What are the SEC regulations regarding stock splits?

    SEC Rule 10b-17 is the main regulation dealing with stock splits. Rule 10b-17 is an anti-fraud regulation of federal securities ... Read Full Answer >>
  9. Where can I find out about upcoming stock splits?

    A stock split is a corporate action decided by a corporation's board of directors, where the company increases its shares ... Read Full Answer >>
  10. Why doesn't Warren Buffett split Berkshire Hathaway stock?

    Warren Buffett has never done a stock split of Berkshire Hathaway Class A shares (BRK.A), and he has flatly stated that Class ... Read Full Answer >>
  11. What is the difference between Berkshire Hathaway's Class A and Class B shares?

    The primary difference between Berkshire Hathaway Class A stock and Class B stock is one of price. Because of the price difference, ... Read Full Answer >>
  12. How do stock splits affect short sellers?

    The simple answer to this question is that stock splits do not affect short sellers in a material way. There are some changes ... Read Full Answer >>
  13. How does a stock split affect cash dividends?

    When a company decides to issue a stock split (or stock dividend), a couple of possibilities could occur concerning what ... Read Full Answer >>
  14. What are reverse stock splits?

    A reverse stock split is a corporate action in which a company reduces the number of shares it has outstanding by a set multiple. ... Read Full Answer >>

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