What is a stock split and why are they done?

A stock split is where a public company increases the number of shares available to be purchased. After a stock split the market capitalization of the company remains the same and stock price is changed accordingly.

2 for 1 stock split

For example a 2 for 1 split would mean the number of available shares is doubled. If the stock price was $100 before the split, it would be $50 afterwards. If you owned stock in a company that did a 2 for 1 stock split you would subsequently own twice as many stock.

Why do a stock split?

The main reason to for a stock split is to increase demand for the stock. A lower priced stock is likely to be affordable to a wider group of investors than a higher price stock.

Immediately after a stock split, there can often be a change in demand which can often lead to an increase in the a company’s stock.

Some investors believe that a stock split is a good sign and increases the chances that the company’s stock will continue to grow.

What is a reverse stock split?

A reverse stock split is where a company decreases the number of outstadning shares in a company. Some stock exchanges require companies to maintain a minimum stock price, so if a companies stock price is too low, they may have to issue a reverse stock split to stay listed.

If a company had 2 million remaining shares priced at $3 and performed a 4 to 1 reverse split, they would then have 500,000 shares priced at $12 each.

It’s not for everyone

Not all companies elect to split their stocks. One example is Warren Buffett’s Berkshire Hathaway. The company has enjoyed steady growth for decades and at the time of writing this article, it would cost you over $80,000 to buy just 1 share inthe company.