A Stock split is when a company increases its number of outstanding shares and commensurately decreases those shares’ value.
- When a stock splits, the share price goes down and the number of shares goes up.
- If a company splits 2-for-1, 500 shares at $20 becomes 1,000 shares at $10.
- Splits make stocks more liquid and more affordable to everyday investors.
How is it possible to turn 1 million shares into 2 million overnight?
By doing a stock split!
If you own 50 shares of WalMart (NYSE:WMT) and the company does a 2-for-1 stock split, you now have 100 shares of WMT stock.
Did you just double your money?
No, because in a 2-for-1 stock split, the share price gets cut in half.
If one share of Amazon (NASDAQ:AMZN), for example, costs $2,000, then only investors with over two thousand dollars could become shareholders. So, the thoughtful chaps running Amazon might make a decision to split shares 3-for-1. So in this example, one share is worth $2000 before the split and afterward there are three shares worth $666.67 each — same difference. However, now there are more shares on the market, making it even easier for people to buy and sell them.
During a split, the value of the company never changes, but it makes the company look more affordable to small investors – and they start buying. This can boost demand and drive up the stock price for a short time following the split.
What is a reverse stock split?
Just as a company like Google (NASDAQ:GOOG)(NASDAQ:GOOGL) may want to seem more affordable, smaller companies like Nio (NYSE:NIO) sometimes want to appear more expensive and, in turn, more reputable.
A stock that is valued at $1 per share can do a reverse 5-for-1 split and end up with a $5 stock and 1/5 as many shares on the market.
If you want to learn more about investing, check out our Think Like an Investor series:
- Everything you need to know about investing
- What is short selling?
- What is after-hours trading?
- What is a dividend reinvestment plan?
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