A stock split is a corporate action in which a company divides its existing shares into multiple shares. The total value of all the shares remains the same, but the number of shares outstanding increases. For example, in a 2-for-1 stock split, each shareholder would receive an additional share for every share they hold. As a result, the stock price is proportionally reduced. A stock split does not impact the overall ownership or value of the company but aims to increase the liquidity and accessibility of the shares, making them more affordable to a larger number of investors.
A stock split is usually represented using a ratio, such as 2-for-1, 3-for-1, or 5-for-1. After the split, the price per share will decrease, but the total market value of the shares held by an investor will remain the same.
For example, let's say a company's stock is trading at $100 per share, and it decides to do a 2-for-1 stock split. After the split, each shareholder will receive an additional share for every share they hold. So, if an investor previously had 100 shares, they will now have 200 shares. However, the stock price will be adjusted to $50 per share (100/2).
Stock splits are usually done by companies whose shares have become expensive for individual investors to purchase. By reducing the share price through a split, the company aims to make the shares more affordable and increase the trading activity in the stock, attracting more investors.