If a share is a piece of a pie, then a stock split means dividing one piece of the pie into smaller pieces. If you own 1 share and a 1-2 split occurs (this the most common split), you will now have 2 shares that are worth exactly half the price of the old one. You have the same amount of pie to eat, just in smaller, more manageable bites.
Why do companies do this?
1. So more people will buy their stock. Imagine that you are shopping with a $100 budget. A company’s stock catches your eye, but it costs $80, which seems a bit pricey considering your budget. The company does a split and all of the sudden its share price drops to $40. Now it seems much more afforable, so you buy it.
2. To increase the liquidity (cash value) of shares. The more shares a company has, the easier it is to buy and sell them on the market. Splitting is therefore a good idea for a company that entered the market with a few very expensive shares.
Are there any benefits for those who have shares in the company before the split? No, unless it attracts other investors who then buy shares in the company and increase its value.
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