Stock Splits: Overview (1 of 34)

What is a Stock Split?

The issuers of underlying stock, i.e. the corporations on whose stock your equity options are based, may decide to split their stock. The impact on the shareholders is that after a certain date they will own more shares, but at a proportionally lower price.

There are numerous reasons corporations may declare stock splits. Very often the motivation for lowering the stock price is to stimulate trading activity. Lower stock prices also make it affordable for more investors to purchase round lots of shares, or 100 share blocks, which facilitates bookkeeping for the corporation issuing the stock. Whatever the specific reason, stock splits generally reflect management's optimism about future earnings and growth.

As a stockholder, does a split immediately impact the total value of shares held? No. The aggregate value of your holdings will be fundamentally the same on the morning the split has been implemented, before the opening of the market, as at the close of the market the day before.

The overall effect is similar to getting change for a five-dollar bill. Before you get change you have one note worth five dollars; after you receive change you will have five one-dollar notes. The difference is only the value of each note. The aggregate value is the same five dollars.

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