What Is A Stock Split?

We always hear of high-priced stocks

Even if you're just slightly familiar with the stock market, you've probably heard of a stock split. It's a rather interesting concept that requires giving more shares of a stock to stockholders, then lowering the price of a stock. In the long run, it's usually a good thing for investors. Here's how it works.

Let's say company ABC has a stock price of $100 per share. At that price, many investors will probably not buy it, simply because the price has gotten so high that it will cost a lot of money just to buy a few shares. So the board of directors at ABC decide that it's time to split the stock, 2 shares for 1. This means that you will get two shares in exchange for every one share that you already own. The stock price will then be adjusted lower so that the market value is the same.

So if you own 100 shares at $100 per share, your total value is $10,000. After the stock split, you will get an additional 100 shares, which will give you 200 shares total, but the stock price will drop to $50 per share. So your total value is still $10,000 (200 x $50). So what's the benefit of a split? The benefit is that a $50 price tag on a stock is much more attractive to investors than $100. This means there is a better chance that investors will start buying the stock again, driving the price right back up.

Splits can occur in any form a company would like...3 for 2, 5 for 1, 10 for 1....whatever it takes to bring the price down to a good level that is attractive to investors.

Another type of split, though much less common, is a reverse split. In a reverse split, a company takes shares from investors, but then increases the price of the stock to keep your market value the same. Reverse splits are generally done on extremely low-priced stocks so that the price will be raised to a level that large institutional investors will be attracted to it.

So in the long run, a stock split is generally good for investors. It gives them more shares, lowers the price of the stock, which then makes the stock more attractive to potential buyers.

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