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.
Related Terms
If a company was an apple pie, a stock would be a slice of the pie. In short, a stock is a slice of a company. Everyone who owns a piece of a company has the right to share a portion of the profits of the company. Read more
Spin-off is the term used to describe the creation of a new company from an existing company. When it occurs, shares of the newly created spin-off company can be distributed to the shareholders of the older company, or sold directly on the stock market. Read more
The stock market encompasses all the people, companies and institutions buying and selling slices of publicly-owned companies and other securities. Read more
About The Author: Edouard
Edouard is a financial analyst at Hardbacon. He is responsible for compiling lists of securities that our users can find in the "Explore" section of the application.
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