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. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  4. Split-Up

    A corporate action in which a single company splits into two ...
  5. Fractional Share

    A share of equity that is less than one full share. Fractional ...
  6. Issued Shares

    The number of authorized shares that is sold to and held by the ...
Related Articles
  1. 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. ...
  2. Investing

    What Are Corporate Actions?

    Corporate actions are processes that change a company’s stock. Here are a few examples.
  3. 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 ...
  4. Investing

    Should Chipotle Consider a Stock Split? (CMG)

    Learn why it might be good for Chipotle to enact a stock split. Discover why some investors are bearish on the company's prospects.
  5. Investing

    Every Time A Stock Splits, This Fund Wins

    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 ...
  6. 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 ...
  7. Trading

    If You Had Invested Right After Apple's IPO

    Learn about how much a $1,000 investment in shares of Apple Incorporated would be worth if you invested at its initial public offering price.
  8. 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.
  9. 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.
  10. Insights

    If You Had Invested Right After AT&T's IPO (T)

    Analyze how AT&T stock has performed after the company's 1984 IPO, and learn how you would have fared had you been an early investor.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. What happens to the value of a mutual fund when a stock splits?

    Find out what happens to the value of a mutual fund when a stock in its portfolio splits, including how stock splits work ... Read Answer >>
  5. Does a stock split lead to the gapping up/down of the stock?

    If a company splits its stock, there will be no gapping of the stock due to the split itself. A stock split does not materially ... Read Answer >>
  6. How does a company decide when it is going to split its stock?

    Learn why some companies decide to split their shares, and understand how they think it helps the stock's liquidity and future ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center