Stock Split Basics

• Stock splits result from a decision made by the company's board of directors. If the board believes the share price is too high, they may make a decision to split the shares. For example, if you own 100 shares of XYZ stock, which is currently trading at $200 a share, your total investment is worth $20,000. If the company announces a 10-for-1 split, your 100 shares will be replaced with 1,000 shares worth $20 each. Your total investment will still be $20,000.
  
  

Stockholder's Equity

• When you buy shares of stock, you actually take a partial ownership position in the company, which gives you equity in the company. Stockholder's equity is determined by subtracting all of the company's liabilities from its assets. To find equity per share, you need to divide total stockholder's equity by the number of shares outstanding. When a stock split occurs, the total equity you own in the company remains unchanged. However, the equity per share decreases along with share price.
  
  

Reverse Stock Splits

• Stocks can also be split in reverse. This happens when share prices are too low and the board of directors wishes to increase the price per share. In a reverse split, the number of outstanding shares are reduced, while the share price of each stock is simultaneously increased. Following a reverse split, you will own fewer shares that are valued at a higher price each and your equity percentage in the company will remain unchanged.
  
  

Stock Split Advantages

• While the equity you own in the company remains unaffected by a stock split, you are likely to benefit from higher future share prices. When a stock is very expensive, many investors avoid buying for psychological reasons. When the price of each share decreases, it can create new demand for shares, which drives the price higher. Stock splits also increase liquidity because they create a larger number of shares. Increased liquidity means it is easier to buy and sell the stock quickly.