An increase in a corporation’s number of shares outstanding without any change in the shareholder’s equity or market value. When a stock reaches a high price making it illiquid and difficult to trade, management may split the stock to get the price into a more marketable trading range. For example, an investor owns one standard trading until a stock that now trades at $70 each (portfolio value is $,000). Management splits the stock 2:1. The investor would now own 200 new shares at a market value, all things being equal, of $35 each, fr a portfolio value of $7000.
What is a Stock Split?
A stock split is a corporate action in which a company increases the number of its outstanding shares by issuing more shares to existing shareholders. This results in a decrease in the per-share price of the stock, while the total value of the shares remains unchanged. For example, a 2-for-1 stock split would double the number of shares outstanding and halve the per-share price.
Stock splits are typically done by companies that have seen their stock price rise significantly over time, making the stock less affordable for individual investors. By reducing the per-share price, the company can make the stock more accessible to a wider range of investors and increase its liquidity. However, stock splits have no impact on a company’s fundamental value or its financial performance, and are therefore considered a cosmetic change by some investors.
