What is a "split" in the stock market?

It is when a company reduces the price of its shares but in exchange gives more shares for the price.
Example
a two for one split for X company means yesterday their shares sold for say 2.00 per share and you had 100 shares. Today the price is 1.00 per share but you now own 200 shares. This is normally done when a share price becomes expensive to the point that reducing the share price will entice more purchasers.

When all shares are "split"...in other words if you have 1 share of ABC corp before the split then you will have 2 shares after the split. The two new shares will be worth the same as the original share...so if the share was worth $10, each of the new shares is worth $5 each. Many companies do this to keep their stock price within a certain range.

A "split" is an adjustment in price of a company's stock, by changing how many shares of stock exist.

The simplest way to do this is to imagine a straight two-for-one (2:1) split. So let's imagine that Acme Widgets has issue a million shares (1,000,000) of stock and each share is worth $10. The total amount (number of shares times times price per share) is therefore ten million dollars ($10,000,000). This amount is called their market capitalization, and it's the total amount that investors believe Acme Widgets is worth.

Now, Acme's president decides that, for some reason (more later), they want to do a 2:1 split. On the day the split takes effect, Acme will have 2 million shares (2,000,000) of stock.

But to keep the market capitalization the same, each share will be worth $5.

So why did Acme decide to do this? There are lots of reasons. One of the most common is when a company's shares are getting very expensive; some companies like to keep individual shares around a specific limit as a way to entice people to purchase them in good-sized lots for a reasonable price. So if the company really likes to keep its shares at $35 or so and the stock price approaches $70 a share, they may announce a split. A split also signifies that the company has high hopes for its financial future and believes that they are poised for growth, so a company may announce a split as part of an overall program of managing their market capitalization and, for lack of a better word, their "image" among market analysts.

There are several side benefits, most of them good, when you own shares that split. The most immediate is that as the share price rises, your position's total value increases more quickly because you have more shares. So if you had 100 shares of Acme and they split 2:1, you will have 200 -- so if each share goes up a dollar, you're $200 richer. (Sadly, the reverse is also true; if they drop a dollar, you're crying twice as hard as you were for a $1 drop before the split.)

Finally, not all splits are 2:1. Some companies split their stock 3:2 -- meaning that for every 100 shares you end up with 150. And it's also possible for companies to split the other way -- REDUCING the number of shares outstanding, and INCREASING the price per share.

Of course, the actual value of the company's stock should reflect more than simply how many shares there are; in the end, share price reflects how much investors think the company will grow over the time that the investors plan to hold those shares. But a split is generally considered a good thing by most investors and most analysts.

Don't forget there is also something called a REVERSE SPLIT that companies (are forced to) use when their share price gets too low.

Say the price has gone below $1 ... which in most cases, after 6 months or so ... forces the company to "re-list".

They then do a reverse split. The opposite of a normal split.

You can have a 2-to-1, 3-to-1 etc. In general x-to-1 and I even remember a company doing a 7-to-1.

So lets say the shares were $1 and they do a 7-to-1.

Bang ... the new shares are now worth $7 but you only have 1/7th the shares.

Reverse splits in general are bad news. I haven't seen any of late. But check around.

So just another perspective on splits.

Here is a blog you might want to check out!

http://stockmarketstrategy.blogspot.com

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 by the company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders. For example, in a 2-for-1 stock split, every shareholder with one stock is given an additional share. So, if a company had 10 million shares outstanding before the split, it will have 20 million shares outstanding after a 2-for-1 split.

A stock's price is also affected by a stock split. After a split, the stock price will be reduced since the number of shares outstanding has increased. In the example of a 2-for-1 split, the share price will be halved. Thus, although the number of outstanding shares and the stock price change, the market capitalization remains constant.

A stock split is usually done by companies that have seen their share price increase to levels that are either too high or are beyond the price levels of similar companies in their sector. The primary motive is to make shares seem more affordable to small investors even though the underlying value of the company has not changed.

A stock split can also result in a share price increase since many small investors think that the stock is more affordable and buy the stock, thereby boosting demand and driving up prices. Another reason for the price increase is that a stock split provides a signal to the market that the company's share price has been increasing and people assume that this growth will continue in the future, and again, lifting demand and prices.

Another version of a stock split is the reverse split. This procedure is typically used by companies with low share prices that would like to increase these prices to either gain more respectability in the market or to prevent the company from being delisted from the stock exchange (many stock exchanges will delist stocks if they fall below a certain price per share). In a reverse 5-for-1 split, 10 million outstanding shares at 50 cents each would be changed to only two million shares outstanding at $2.50 each. In both cases, the company is worth $50 million.

The bottom line is a stock split is used primarily by companies that have seen their share prices increase substantially and although the number of outstanding shares increases and price per share decreases, the market capitalization and thus the value of the company does not change. As a result, stock splits help make shares more affordable to small investors and provides greater marketability and liquidity in the market.

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