What is a stock split? A Stock split is when a company increases its number of outstanding shares and commensurately decreasing those shares' value.
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What is a Stock Split?

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.

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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.

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Michael O'Mahony
Michael O'Mahony
Michael is a writer here at MyWallSt. His first and favorite stock is Square, which he sees becoming a massive player in the payments industry and a leader in the war on cash.