What is a stock split?

A stock split is when a company splits the stock up, so the price goes down, but the number of stock shares goes up proportionately. For example, if a company has 100,000 shares of stock currently and these are priced at $200 a share, the value of the stock in the company is $20,000,000. After a two to one stock split, the company would have 200,000 shares of stock priced at $100 a share, and the value of the stock would remain at $20,000,000. So, the value stays the same, just the price and number of shares change. Stocks can be split at any ratio, 2 to 1 is common, but as long as the numbers stay proportionate, and the value of the stock as a whole stays the same, then it really does not matter.

What does that mean for current stock holders?
It means that the stock holder now has more shares in the company, but each share is priced less. Their overall value of stocks stays the same, though the price of stocks is generally affected by a stock split, and so there is a good chance the value of their stock will go up because of the stock split.

Does a stock split really affect the stock's price?
The answer to this question is simply no and yes. While this does not sound simple, the fact is, when the stock splits, the value of the stock as a whole stays the same. So, no the stock price is not effected. A stock holder still holds just as much value of stock as they did before. For example, while before a stock split an investor has 100 shares of stock at $40 a share, so they have $4000 worth of stock, after the split they have 200 shares of stock at $20 a share, so they still have $4000 worth of stock.

However, the second part of the answer is yes.it does affect the stock's price.

The way that the price is affected is psychological. As the price of a stock gets higher and higher, the stock becomes unaffordable for small investors, and thus they do not buy it, so the solution is to make the price per share less, but the value of each share less as well. Splitting the stock brings the share price down to a more "attractive" level, but the ownership in the company remains the same, there is just more stock to divide between. The effect here is purely psychological. So, while the price changes, the value does not. However, the lower stock price may affect the way the stock is perceived and therefore entice new investors. So, as the stock becomes more affordable, more people buy it, and then the price goes up. Thus, the answer is yes because often as a result of splitting stocks, prices will rise.

What other price benefits come with splitting stock?
Splitting the stock also gives other benefits, though most of these are only manifested to existing shareholders. One is that they that they suddenly have more. The number of shares goes up, and since they have more shares than they did before, it is a good feeling. This, while psychological, can become an actual positive because if the prices rises, they have more stock to trade. Many really enjoy this feature as it allows them to keep stock, but still profit from the rise in prices.

The thing to remember with stock splits is that while the price and number of shares may change, the overall value of the stock stays the same.

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