What Is a Stock Split?
Ali Hussain
Personal Finance, Investing
A stock split is when a company decides to increase the number of shares by dividing its existing shares into additional shares.

Stock splits don't provide any economic value to the company. They just reduce the stock's price, making it more affordable.

Stock splits are often good signs for shareholders, attracting new investors and eventually leading to a share-price rise.

As an investor, the idea of "splitting" anything is probably not at the top of your list.

But when it comes to stocks, your portfolio may benefit from a split.

A stock split occurs when a company makes its shares more affordable by dividing its existing shares into a larger number of less expensive ones.

In a stock split, the company's overall value stays the same. A split may reduce the price per share, but it doesn't affect the company's market capitalization. There are simply more shares to go around.

If you're already a shareholder in a company when it declares a stock split, not much changes. Nevertheless, it's important to grasp how stock splits work, especially for understanding how the market may react post-split.

What is a stock split?

Understanding stock splits

Publicly traded companies have a set amount of outstanding shares available in the market.

A stock split is exactly what it sounds like: It's an action by a company's board of directors to increase the number of available shares of stock by "splitting" existing shares.

A stock can be split in as many ways as a company chooses, supplemented with ratios such as "2-for-1," "3-for-1," all the way up to "100-for-1." All this tells you is how much one share is now worth. For instance, in a 2-for-1 split, every single share held by an investor now becomes two. When this happens, the number of shares the investor has will literally double.

When companies opt for a stock split, they increase the overall number of outstanding shares and lower the value of each individual share. But that doesn't mean the overall valuation of the company changes. Nor does the overall dollar amount of the investor's stake.

To provide an example, let's say Apple (AAPL) decides to do a 2-for-1 stock split. For simplicity's sake, assume you own one share of Apple's stock.

With its 2-to-1 split, Apple grants you one additional share, so you now have a total of two. But each share is then valued at half of the original. The two shares have the same monetary value as the one share pre-split.

For existing shareholders, the result is the same — the total value of their shares remains consistent. There are just more pieces of the pie.

For new investors, an announcement of a stock split can signal a time to buy, since a lower price per share means buying at lower prices. Overall, stock splits often signal to the market that the share price is increasing and the company is optimistic it will continue to do so in the future.

Why do companies split stock?

There are many reasons why a company may consider a stock split. Since stock splits don't add market value, much of it comes down to making the stock more attainable to everyday investors, and how this impacts behavior by influencing the psychology of investors.

Here are the main reasons why a company may split a stock:

The main purpose of a stock split is to reduce the price of an expensive stock — especially when compared with price levels of peers in the industry — making it accessible to more investors. If a stock costs less, it might be easier for an investor to incorporate it into their portfolio, especially if the shares were rather expensive before a share split.

Some companies have held sizable stock splits. Amazon, for example, announced that its common shares would undergo a 20-for-1 stock split in 2022, which took place in June. Following this event, every investor had 19 additional shares for every unit of common stock they had before this event.

Interestingly enough, there are some famous stock splits which have been even larger. For example, Warren Buffett's Berkshire Hathaway split its shares 50-for-1 back in 2010. More recently, Chipotle announced in March 2024 that it would go forward with a 50-for-1 stock split.

Because a stock split increases the number of shares in circulation, it can result in greater liquidity, which makes it easier for the stock to be traded. By reducing share prices, companies can attract a wider range of investors, therefore boosting trading volume.

Such an increase in liquidity benefits investors as it makes buying and selling stocks at fair prices much simpler. Trades can also be executed much faster.

When a stock splits, the company creating this split is often perceived to be a successful one. The fact that the share price is so high that it must split its stock indicates to investors that the company has been performing well, and its shares must be a good investment.

A stock split also often increases the share price after its initial reduction. As the reduced price makes a stock cheaper, more investors are able to purchase it, driving up the demand and, therefore, the price.

How a stock split affects you

There are several ways that a stock split can impact you as an individual shareholder.

For starters, a share split results in a greater number of shares outstanding that simply have a proportionately lower price. This development can prove bullish, as reducing the price of a share may influence investors by making them think it is a better deal and motivating them to purchase it. This, in turn, can increase the value of the shares over the long run.

Another way a share split can impact you as an investor is by making individual common shares more affordable. Following one of these events, you may be able to purchase shares of a stock that were previously unaffordable because their price was too high.

This might make it easier for you to construct your ideal portfolio. For example, let's say that a share of a company you want to purchase is trading for $2,500. If it undergoes a 20-for-1 split, and its price goes down to $125, that might make it far more accessible, getting you closer to your intended allocation.

One more way that splitting shares in this manner can impact you as an individual is by providing a signal to the broader markets that a company opting to split its shares is succeeding and will continue to do well going forward. Such an event can prove positive for a company's image, generating favorable visibility and therefore drawing investors to the organization.

This could in turn fuel greater demand for the company's shares, causing their value to rise and increasing the value of your portfolio.

A stock split, in and of itself, will not change the monetary value of your stake in a company. This is important to keep in mind, as an investor may respond to such a split by thinking that their investment in a particular business is greater than it was before.

A stock split is a way for a company to increase the number of shares outstanding without issuing new shares, an event that would dilute the value of existing shares.

Stock Split FAQs
A stock split is when a company decides to increase the number of shares by dividing its existing shares into additional shares.
Stock splits don't provide any economic value to the company. They just reduce the stock's price, making it more affordable.
Stock splits are often good signs for shareholders, attracting new investors and eventually leading to a share-price rise.
As an investor, the idea of "splitting" anything is probably not at the top of your list. But when it comes to stocks, your portfolio may benefit from a split. A stock split occurs when a company makes its shares more affordable by dividing its existing shares into a larger number of less expensive ones. In a stock split, the company's overall value stays the same. A split may reduce the price per share, but it doesn't affect the company's market capitalization. There are simply more shares to go around. If you're already a shareholder in a company when it declares a stock split, not much changes. Nevertheless, it's important to grasp how stock splits work, especially for understanding how the market may react post-split. Publicly traded companies have a set amount of outstanding shares available in the market. A stock split is exactly what it sounds like: It's an action by a company's board of directors to increase the number of available shares of stock by "splitting" existing shares. A stock can be split in as many ways as a company chooses, supplemented with ratios such as "2-for-1," "3-for-1," all the way up to "100-for-1." All this tells you is how much one share is now worth. For instance, in a 2-for-1 split, every single share held by an investor now becomes two. When this happens, the number of shares the investor has will literally double. When companies opt for a stock split, they increase the overall number of outstanding shares and lower the value of each individual share. But that doesn't mean the overall valuation of the company changes. Nor does the overall dollar amount of the investor's stake. To provide an example, let's say Apple (AAPL) decides to do a 2-for-1 stock split. For simplicity's sake, assume you own one share of Apple's stock. With its 2-to-1 split, Apple grants you one additional share, so you now have a total of two. But each share is then valued at half of the original. The two shares have the same monetary value as the one share pre-split. For existing shareholders, the result is the same — the total value of their shares remains consistent. There are just more pieces of the pie. For new investors, an announcement of a stock split can signal a time to buy, since a lower price per share means buying at lower prices. Overall, stock splits often signal to the market that the share price is increasing and the company is optimistic it will continue to do so in the future. There are many reasons why a company may consider a stock split. Since stock splits don't add market value, much of it comes down to making the stock more attainable to everyday investors, and how this impacts behavior by influencing the psychology of investors. Here are the main reasons why a company may split a stock: The main purpose of a stock split is to reduce the price of an expensive stock — especially when compared with price levels of peers in the industry — making it accessible to more investors. If a stock costs less, it might be easier for an investor to incorporate it into their portfolio, especially if the shares were rather expensive before a share split. Some companies have held sizable stock splits. Amazon, for example, announced that its common shares would undergo a 20-for-1 stock split in 2022, which took place in June. Following this event, every investor had 19 additional shares for every unit of common stock they had before this event. Interestingly enough, there are some famous stock splits which have been even larger. For example, Warren Buffett's Berkshire Hathaway split its shares 50-for-1 back in 2010. More recently, Chipotle announced in March 2024 that it would go forward with a 50-for-1 stock split. Because a stock split increases the number of shares in circulation, it can result in greater liquidity, which makes it easier for the stock to be traded. By reducing share prices, companies can attract a wider range of investors, therefore boosting trading volume. Such an increase in liquidity benefits investors as it makes buying and selling stocks at fair prices much simpler. Trades can also be executed much faster. When a stock splits, the company creating this split is often perceived to be a successful one. The fact that the share price is so high that it must split its stock indicates to investors that the company has been performing well, and its shares must be a good investment. A stock split also often increases the share price after its initial reduction. As the reduced price makes a stock cheaper, more investors are able to purchase it, driving up the demand and, therefore, the price. There are several ways that a stock split can impact you as an individual shareholder. For starters, a share split results in a greater number of shares outstanding that simply have a proportionately lower price. This development can prove bullish, as reducing the price of a share may influence investors by making them think it is a better deal and motivating them to purchase it. This, in turn, can increase the value of the shares over the long run. Another way a share split can impact you as an investor is by making individual common shares more affordable. Following one of these events, you may be able to purchase shares of a stock that were previously unaffordable because their price was too high. This might make it easier for you to construct your ideal portfolio. For example, let's say that a share of a company you want to purchase is trading for $2,500. If it undergoes a 20-for-1 split, and its price goes down to $125, that might make it far more accessible, getting you closer to your intended allocation. One more way that splitting shares in this manner can impact you as an individual is by providing a signal to the broader markets that a company opting to split its shares is succeeding and will continue to do well going forward. Such an event can prove positive for a company's image, generating favorable visibility and therefore drawing investors to the organization. This could in turn fuel greater demand for the company's shares, causing their value to rise and increasing the value of your portfolio. A stock split, in and of itself, will not change the monetary value of your stake in a company. This is important to keep in mind, as an investor may respond to such a split by thinking that their investment in a particular business is greater than it was before. A stock split is a way for a company to increase the number of shares outstanding without issuing new shares, an event that would dilute the value of existing shares. 
 What is a stock split? Understanding stock splits Why do companies split stock? How a stock split affects you Stock Split FAQs