What is a Stock Split? | Option Alpha

A stock split is an increase in the number of shares of stock outstanding without any change in shareholder’s equity or market value for the company at the time of the split. As shares outstanding increase, each share’s value decreases proportionately, so there is no effect on the company’s total net value from a stock split.

For example, a two-for-one stock split would double the number of shares outstanding and give every shareholder two shares for every share owned, while reducing each share’s value by half.

Consider a shareholder with 1 share of XYZ stock worth $100. If company XYZ announces a two-for-one stock split, the shareholder would now have 2 shares of XYZ stock worth $50 per share for a total market value of $100.

Stock splits can be two-for-one, four-for-one, or any proportion the board of directors chooses. Companies often authorize stock splits to lower the share price and make ownership more affordable for a broad set of investors.

Learn about reverse stock splits.

FAQs

Is a stock split good?

Companies often authorize stock splits to lower the share price and make ownership more affordable for a broader set of investors. It is neither good nor bad for the investor, as there is no effect on the company’s total market value with a stock split. As shares outstanding increase, each share’s value decreases proportionately, so there is no change in shareholder’s equity or market value for the company at the time of the split.

Why would a company split stock?

Companies often authorize stock splits to lower the share price and make ownership more affordable for a broad set of investors. A stock split increases the number of shares of stock outstanding without any change in shareholder’s equity or market value for the company at the time of the split.

For example, a two-for-one stock split would double the number of shares outstanding and give every shareholder two shares for every share owned, while reducing each share’s value by half. Instead of owning 10 shares at $100 per share, an investor would own 20 shares at $50 per share after a two-for-one split.