Stock Split
A stock split is a corporate action that divides existing shares into multiple shares, reducing the price per share proportionally while maintaining the same total market value.
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Exam Tip
Stock split: more shares, lower price, SAME total value. Reverse split often negative signal.
What is a Stock Split?
A stock split divides each existing share into multiple shares. The total value stays the same—you just have more shares at a lower price per share.
How Stock Splits Work
| Before Split | After 2-for-1 Split |
|---|---|
| 100 shares | 200 shares |
| $100/share | $50/share |
| $10,000 total | $10,000 total |
Common Split Ratios
| Split | Effect on Shares | Effect on Price |
|---|---|---|
| 2-for-1 | Doubles shares | Halves price |
| 3-for-1 | Triples shares | Thirds price |
| 3-for-2 | 1.5x shares | 2/3 price |
| 4-for-1 | 4x shares | Quarter price |
Why Companies Split Stock
- Accessibility - Lower price attracts retail investors
- Liquidity - More shares = more trading activity
- Psychology - Lower price seems more affordable
- Options trading - Standard 100-share contracts more accessible
Reverse Stock Split
A reverse split combines shares:
| Before | After 1-for-10 Reverse |
|---|---|
| 1,000 shares | 100 shares |
| $1/share | $10/share |
| $1,000 total | $1,000 total |
Why reverse split?
- Meet exchange minimum price requirements
- Appear more "legitimate" to institutional investors
- Often seen as negative signal
Key Points
- No change in total market value
- No change in ownership percentage
- Cost basis per share adjusts proportionally
- Not a taxable event
Study This Term In
Related Terms
Common Stock
Common stock is a security representing ownership in a corporation, giving shareholders voting rights and potential dividends.
Market Capitalization
Market capitalization (market cap) is the total market value of a company's outstanding shares, calculated by multiplying the current stock price by the number of shares outstanding. It's used to classify companies as large-cap, mid-cap, or small-cap.
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