· Listen
A stock split happens when a company increases the number of its outstanding shares by dividing each existing share into multiple new ones. A 2-for-1 split turns one $400 share into two $200 shares. The total value you own doesn't change.
Why companies do it
- Make the share price look more affordable to small investors
- Improve trading liquidity
- Stay below psychological barriers like $1,000 per share
Reverse splits
The opposite. A 1-for-10 reverse split turns ten $1 shares into one $10 share. Companies do this when their stock has fallen so low it risks being delisted from major exchanges (which often require shares to trade above $1). Reverse splits are usually a warning sign, not a celebration.
Stock splits don't make a company more valuable. The financial press loves to cover them, but they're cosmetic. Don't change your investment thesis based on a split.
What this lesson is NOT
A split changes the number of shares and the price per share, but the total value you own does not change. This lesson explains why a split is mostly cosmetic; it is not a signal to buy or a sign that a company has become more valuable.
Quick check on this lesson
Answer each question and we’ll show you why the right answer is right, and why the others aren’t.
- 1.
In a 2-for-1 stock split, what happens to your position?
- 2.
According to the lesson, why do companies do regular (forward) stock splits?
- 3.
What is a reverse stock split?
- 4.
Per the lesson, when do companies typically do a reverse split, and what does it usually signal?
- 5.
According to the warning callout, how should a stock split affect your investment thesis?
0 of 5 answered