Stock Split

Loading the player...

What is a '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."

BREAKING DOWN '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.

RELATED TERMS
  1. Reverse Stock Split

    A corporate action in which a company reduces the total number ...
  2. Split Adjusted

    A modification made to a security's price that takes into consideration ...
  3. Reverse/Forward Stock Split

    A stock split strategy that includes the use of a reverse stock ...
  4. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  5. Push Out

    One of two ways to effect a stock split. In a push out, new share ...
  6. Split-Up

    A corporate action in which a single company splits into two ...
Related Articles
  1. Investing

    Berkshire's Stock Splits: Good Buy Or Goodbye?

    Warren Buffett's Berkshire Hathaway recently split its stock. Is this a sign to buy?
  2. Investing

    Stock Splits: A Closer Look At Its Effects

    Most trades, including short sales and options, aren't materially affected by a stock split. Still, it's important for shareholders to understand how these events impact various aspects of investing. ...
  3. Investing

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  4. Investing

    If You Had Invested Right After Amazon's IPO

    Find out how much you would have made if you had invested $1,000 during Amazon's IPO, including how the power of the stock split affects investment growth.
  5. Markets

    Do Stock Splits Cause Volatility?

    Since stock splits decrease the stock price, do they also increase volatility because shares are traded in smaller increments? Investopedia examines assumptions about this increasingly common ...
  6. Markets

    Understanding Stock Splits

    Find out how stock splits work and how they affect investors.
  7. Investing

    The Highest Priced Stocks In America

    These stocks don't come without a hefty price tag. But are they worth it?
  8. Investing

    The New ETF That's Profiting From Stock Splits

    Stock splits are typically seen as bullish events, even though they don't change the value of your investment. They simply increase the number of shares outstanding and reduce the price per share ...
  9. Managing Wealth

    If You Had Invested in Walmart Right After Its IPO (WMT)

    Discover the value of your shares in 2015 if you had purchased 100 shares of Wal-Mart Stores, Inc. at its initial public offering (IPO) price.
  10. Markets

    If You Had Invested Right After JPMorgan's IPO (JPM)

    Find out how much your investment would be worth in 2016 if you had purchased 100 shares during JPMorgan's IPO, including the impact of dividends and splits.
RELATED FAQS
  1. 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 Answer >>
  2. How and why does a stock split?

    Learn why stock splits do not occur very often for individual stocks, and understand the impact of reverse stock splits on ... Read Answer >>
  3. 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 Answer >>
  4. Can a mutual fund's shares split?

    Learn about mutual fund share splits and why they occur, including how splits and reverse splits affect share price and total ... Read Answer >>
  5. Why would a company perform a reverse stock split?

    Understand what a reverse stock split entails, and learn what the common motivations are for a company to perform a reverse ... Read Answer >>
  6. If one of your stocks splits, doesn't that make it a better investment? If one of ...

    Unfortunately, no. To understand why this is the case, let's review the mechanics of a stock split.Basically, companies choose ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center