Series 65: Stock Splits

Stock Splits

If a company believes that the price of its stock has risen too high for the general public to purchase, it may carry out a stock split, meaning each outstanding share will split into two or more shares. The most common stock split is a 2-for-1 split. This means that every shareholder will receive twice the number of shares that he currently owns.

As with a stock dividend, when a stock split occurs, the total value of the stock does not change. Instead, the share price adjusts to reflect the split. In the case of a 2-for-1 split, the share price splits in half. In the case of a 3-for-2 split, the share price drops to two-thirds of what it was formerly.

Occasionally, a company will decide that its share price is too low. The company may worry that a low share price hurts their image or that their stock may not meet continued listing requirements on an exchange. When this occurs, the company may carry out a reverse split. In this case, all investors will receive a fewer number of shares for their current shares. In a 1-for-2 split, the number of shares an investor owns will be reduced by half, but each share will be worth twice its former value, so the investor’s total investment value will be the same after the split.