What is a stock split?

A stock split: what it is and how does it work?

The first time I experienced a stock split, I thought I'd lost half my shares in one fell swoop.

After some research, I thankfully found out this isn't the case, and often, it can be a good thing for investors. Here's all you need to know on stock splits.

Definition of a stock split

A stock split is when a public company alters the number of its shares available to the public. The value of the company remains the same, but the amount of shares and price per share will change.

The amount of shares usually increases, but occasionally, a ‘reverse stock split’ can happen which means the shares available decrease. Either way, the company’s value remains the same.

So to recap:

  • The number of shares will change, but the total value of all shares is the same

  • A stock’s price will change 

  • The amount of shares you own will change 

  • The value of the company will not change

The most common split types are 2-for-1 or 3-for-1 (sometimes called 2:1 or 3:1). For example, in a 2-for-1 stock split, for every share you had before the split, you’d have two after. 

Example of a stock split

If a company called 'Beds for Beagles' has 10 million shares, priced at £2 each, the company would have a market capitalisation (‘market cap’) of £20 million (as 10,000,000 × 2 = 20,000,000)

If Beds for Beagles then took what’s known as ‘corporate action’ and decided to undergo a stock split by 2-for-1, then there would be 20 million shares available. Of course, the share price would then half to £1. Although the two numbers have changed, the market cap remains the same as 1 × 20,000,000 = 20,000,000.

Stock split explained using an example, Bed for Beadles
🤓 Nerd moment - investing platforms like Shares ensure that an investor's account updates accordingly so the value of their portfolio remains the same.
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Why does a stock split happen?

A traditional split often happens when a stock’s price becomes too high. By reducing the share price, it encourages more people (typically newer/retail investors) to buy the stock. A lower stock price makes it easier for those with less money to purchase shares, which increases liquidity (the amount of shares in circulation being traded). 

✏️ Scoop tip - although fractional shares exist, they can incur higher transaction costs than buying a whole share, which is why companies like to split their stock.
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Types of stock splits

There are two main types of stock splits:

1. The traditional stock split

A traditional stock split is the most common form of split. Like in our example above, each shareholder will receive additional shares for each share they already own. Of course, the price per share will be adjusted so the investor is no better, nor worse off than before.

When you hear a '2-for-1' stock split, it simply means the amount of shares has been doubled, but the price per share has been halved. It doesn't have to be a 2-for-1 split either - a 3-for-1, 4-for-1 or even a 100-for-1 split can take place!

🤓 Nerd moment - Warren Buffett’s company, Berkshire Hathaway (BRKA), has never split its stock, which is why it’s the world’s most expensive stock at $469,000!
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2. The reverse split

A reverse split is the opposite of a traditional split. It reduces the number of outstanding shares, and as a result, increases the stock price per share.

🤓 Nerd moment - Citigroup famously reverse split its stock back in 2011 to get its stock price back into double digits.
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Are stock splits good or bad?

Stock splits are usually seen as a positive sign by investors and the market, as they can indicate that a company is performing well and is confident in its future prospects. But, it’s important to remember that a stock split doesn't change any fundamentals of the company. As an investor, you should be understanding a company's motives for wanting to split its stock.

Got any more burning questions? Ask away in one of our communities inside the Shares app.

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As with all investing, your capital is at risk. 

Shares App Ltd is an appointed representative of RiskSave Technologies Ltd, which is authorised and regulated by the Financial Conduct Authority (FRN 775330). Shares App Ltd is a company registered in England and Wales with company number 13374448.

Meet the authors

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James Ashoo

Senior Content Writer

James has been investing for over five years. His aim is to explain the hard stuff, easily! When he's not chewing your ear off about stocks and crypto, he'll most likely be telling bad jokes.

Harjas Singh

Harjas Singh

Chief Product Officer & Co-Founder

With a wealth of experience in fintech, Harjas is the man in the know when it comes to all things product. Investing features, chatting capabilities and thriving communities – he oversees all development on the Shares app!

Harry Harrison

Harry Harrison

Finance Writer

Harry is an experienced business writer, with a love for all things tech. In his free time, he enjoys reading, playing sport and winning at chess. He also loves posting inside the Shares app!