Stock Split

AAA

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."

INVESTOPEDIA EXPLAINS 'Stock Split'

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.

VIDEO

RELATED TERMS
  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. Split-Up

    A corporate action in which a single company splits into two ...
  5. Split Adjusted

    A modification made to a security's price that takes into consideration ...
  6. Fractional Share

    A share of equity that is less than one full share. Fractional ...
Related Articles
  1. Dissecting Declarations, Ex-Dividends ...
    Investing Basics

    Dissecting Declarations, Ex-Dividends ...

  2. Understanding Stock Splits
    Investing Basics

    Understanding Stock Splits

  3. Don't Let Stock Prices Fool You
    Active Trading

    Don't Let Stock Prices Fool You

  4. How To Profit From Stock Splits And ...
    Investing Basics

    How To Profit From Stock Splits And ...

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center