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  • Writer's picturePatrick Aloisio

What is a Stock Split?


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What is a Stock Split?


A stock split is when a company increases its number of shares to increase the stock’s liquidity. And as a result, it cuts the share price for the stock. Why would a company do this?


Reason #1 is to increase the stock’s liquidity. Meaning if there are only 10,000 shares available on the market, a 2 to 1 stock split will create double the shares available, now 20,000!


Does this also double the company’s value? Unfortunately for the company, that’s not the case, but it does take us to the 2nd main reason for a stock split…


Reason #2 it cuts the stock price in half (for a 2 to 1 split). So if a company’s stock might be considered expensive, a 2 to 1 stock split would cut the price in half.


For example with 10 Shares of Amazon stock at $3000 per share, after a 2 to 1 split you would have 20 shares at $1500. And now maybe new investors are able to afford the $1500 price point.


To take this a step further, if it were a 3 to 1 stock split, the 10 shares at $3000 would now be 30 shares at $1000. You can now see the appeal for a company to provide a big stock split when their stock price is very expensive. 30 to 1 would bring the price back down to $100 per share.

How you'd react to a stock split if you didn't read this:

Reverse stock splits are the opposite. A company decreases instead of increases the number of shares outstanding, which then raises the share price proportionally.


Along the lines of a reverse stock split, is a stock buy-back by the company. They are the same in the sense that the liquidity of the stock is reduced since the company buys a chunk of the available stock on the market. However, it does not change the amount of shares that shareholders have like a stock split would. It will most likely increase the price of the stock since the overall supply of the stock has decreased.


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