What is a stock split?

It's when a firm decides to increase or decrease the number of shares in the company. Usually, it's increase.

They'll increase the number of shares and lower the price so that nothing really changes to the total value. For example, double the number of shares and halve the price for everyone.

Microsoft does it a lot. WHen you own a stock of a company, in a stock split, each stock help by an investor is broken into 2. So if someone own about 1000 shares of a company, after a stock split, he will have 2000 shares.

A stock split is a corporate action that increases the number of the corporation's outstanding shares by dividing each share, which in turn diminishes its price. The stock's market capitalization, however, remains the same, just like the value of the $100 bill does not change if it is exchanged for two $50s. For example, with a 2-for-1 stock split, each stockholder receives an additional share for each share held, but the value of each share is reduced by half: two shares now equal the original value of one share before the split.

Let's say stock A is trading at $40 and has 10 million shares issued, which gives it a market capitalization of $400 million ($40 x 10 million shares). The company then decides to implement a 2-for-1 stock split. For each share shareholders currently own, they receive one share, deposited directly into their brokerage account. They now have two shares for each one previously held, but the price of the stock is split by 50%, from $40 to $20. Notice that the market capitalization stays the same - it has doubled the amount of stocks outstanding to 20 million while simultaneously reducing the stock price by 50% to $20 for a capitalization of $400 million. The true value of the company hasn't changed one bit.

The most common stock splits are, 2-for-1, 3-for-2 and 3-for-1. An easy way to determine the new stock price is to divide the previous stock price by the split ratio. In the case of our example, divide $40 by 2 and we get the new trading price of $20. If a stock were to split 3-for-2, we'd do the same thing: 40/(3/2) = 40/1.5 = $26.6.

So, if the value of the stock doesn't change, what motivates a company to split its stock? Good question. There are several reasons companies consider carrying out this corporate action.

The first reason is psychology. As the price of a stock gets higher and higher, some investors may feel the price is too high for them to buy, or small investors may feel it is unaffordable. Splitting the stock brings the share price down to a more "attractive" level. The effect here is purely psychological. The actual value of the stock doesn't change one bit, but the lower stock price may affect the way the stock is perceived and therefore entice new investors. Splitting the stock also gives existing shareholders the feeling that they suddenly have more shares than they did before, and of course, if the prices rises, they have more stock to trade.

Another reason, and arguably a more logical one, for splitting a stock is to increase a stock's liquidity, which increases with the stock's number of outstanding shares. You see, when stocks get into the hundreds of dollars per share, very large bid/ask spreads can result (see Why the Bid/Ask Spread Is So Important). A perfect example is Warren Buffett's Berkshire Hathaway, which has never had a stock split. At times, Berkshire stock has traded at nearly $100,000 and its bid/ask spread can often be over $1,000. By splitting shares a lower bid/ask spread is often achieved, thereby increasing liquidity.

It's a silly psychological game that companies play with uneducated investors.

A stock split is used when a company wants to reduce the price of the stock to attract investors to buy stock. The most common stock split is 2:1. For eg, Google cost about $400. If Google think more people will buy the stock be splitting the stock into half. They will exercise a 2:1 split in which the price is reduced into $200. Now those people that already own google will have twice at more. So if I own 2 shares of google at $400 each. After the 2:1 split, I own 4 shares at $200 each.

It is exactly what it says.

The total number of stocks double, and likewise the number of stocks you have double.

The value also usually goes in half

When a company changes the # of shares outstanding. It is usually a split where the stockholders get more shares. Sometimes, a company will do a reverse split and each person's share will be exchanged for a fractional share so they can bring the price per share up.

Either way, your dollars invested doesn't change just the # of shares so your investment will have to be divided by the new # of shares to determine you price/value per share.

When a company, like, say, ShearsonLehman the other week, is doing great investing for their people, and more people are investing in their company, the shares of that company are now double their value. But it happens fast..so they split. You bought the one share way back when, now it's worth twice as much. Lotsa luck to you.

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