Learn to Invest
What is a Stock Splits?

How is it possible to turn 1 million shares into 2 million overnight?

By doing a stock split!

If you own 50 shares of Wal-Mart (WMT) and the company does a 2-for-1 stock split, you now have 100 shares of WMT stock.

Did you just double your money?

No, because in a 2-for-1 stock split, the share price gets cut in half.

So, what’s the point of all this?

If one share of Priceline (PCLN), for example, costs $1,000, then only investors with over a thousand dollars could become shareholders. So, the thoughtful chaps running Priceline might make a decision to split shares 3-for-1. So in this example, one share is worth $1000 before the split and afterward there are three shares worth $333.33 each – same difference. However, now there are more shares on the market, making it even easier for people to buy and sell them.

During a stock split, the value of the company never changes, but it makes the company look more affordable to small investors – and they start buying. This can boost demand and drive up the stock price for a short time following the split.

There is also something called a reverse stock split.

Just as a company like Google (GOOG) may want to seem more affordable, smaller companies sometimes want to appear more expensive and, in turn, more reputable.

A stock that is valued at $1 per share can do a reverse 5-for-1 split and end up with a $5 stock and 1/5 as many shares on the market.

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