A stock split is when a company increases the number of its shares to make the price of each share lower. This does not change the total value of the company or your investment. It only changes the number of shares you own and the price per share.

How a Stock Split Works

When a company performs a stock split, it gives current shareholders additional shares for each share they already own. The most common is a 2-for-1 split.

Here is a simple example of a 2-for-1 split:

• Before the split: You own 10 shares of a company, and each share is worth $100. The total value of your investment is $1,000.
• After the split: The company gives you one extra share for each share you own. You now have 20 shares. The price of each share is cut in half to $50. The total value of your investment is still $1,000 (20 shares x $50).

The value of your investment stays the same right after the split. You just have more shares, and each share has a lower price.

Why Companies Split Their Stock

Companies split shares for several reasons:

• To make the price more affordable: When a stock's price gets very high, like $1,000 per share, it can be too expensive for many small investors. A split lowers the price, so more people can afford to buy it.
• To make it easier to trade: A lower price can lead to more people buying and selling the stock. When a stock is easier to trade, we call this having more "liquidity."
• To show confidence: Often, a company splits its stock when it is doing well and expects its value to keep growing. For some investors, a stock split is a positive signal about the company's future.

What Is a Reverse Stock Split?

A reverse stock split reduces the number of shares to increase the price per share.

Here is a simple example of a 1-for-5 reverse split:

• Before the reverse split: You own 50 shares, and each share is worth $1. The total value of your investment is $50.
• After the reverse split: The company gives you 1 new share for every 5 old shares. You now have 10 shares. The price of each share goes up five times to $5. The total value of your investment is still $50 (10 shares x $5).

Why Companies Do Reverse Splits

Reverse splits are less common and usually done to:

• Meet exchange requirements: Some stock exchanges have rules that a stock must have a minimum price, like $1 per share. If a stock's price falls too low, the company might do a reverse split to raise the price and stay on the exchange.
• Attract larger investors: Some large investors have rules that do not let them buy stocks with very low prices. A higher share price can make the company look more stable and attract these investors.

Stock Split Effects

This table shows what happens to your investment in both types of splits.