Stock Splits

When a stock's price increases significantly, investors may become reluctant to buy because they think the stock has reached its peak or because they believe it's too expensive. In this scenario, a company might decide to stimulate trading through a stock split. Splitting the stock will simultaneously increase the number of shares available for purchase and decrease the price. The total market value of the trading shares will remain the same.

For example, if a company's stock is trading at $50 per share and it declares a two-for-one split, you now own two shares for each share that you previously owned. At the same time, the value of each share drops in half, to $25 per share. If you originally owned 100 shares of the company trading at $50 per share, you now own 200 shares trading at $25 per share. After the split, the market value ($5,000) stays the same. Stocks can split three-for-one, three-for-two, ten-for-one, or any other combination.

Although the value of your shares will initially be the same, the company anticipates that an increased level of trading at the lower price will begin to move the stock price back up, closer to its pre-split price.