Stock Split

A stock split is a corporate action that changes the share count of a publicly traded entity. The split process changes the stock's market price and share count by an equal amount. 

​

Stock splits or reverse stock splits have the following effects : 

Stock Split - Increases share count, decreases price per share

Reverse Split - Decreased share count, increases price per share

​

Example of a stock split : 

1. Company ABC trades at $500, with 100M shares outstanding. 

2. Stock split, 5-for-1

3. ABC share price decreases by a factor of 5, to $100 per share. Their shares outstanding gets multiplied by 5 and increases to 500M shares outstanding. Shareholders receive 5 shares of ABC at $100 for every 1 share they held at $500.

​

Example of a reverse stock split :

1. Company XYZ trades at $0.50, with 10M shares outstanding. 

2. Stock split, 1-for-10

3. XYZ share price is increased by a multiple of 10, and shares outstanding are decreased by a factor of 10. The new share price is $5.00, and shares outstanding are decreased to 1M. An investor will now own 1 share at $5.00 instead of 10 shares at $0.50.

​

Reasons for a stock split are mostly for compliance or vanity. One such example is the infamous Elon Musk tweet that "Tesla share price is too high in my opinion". Subsequently, the company files for a stock split which maintains the market valuation of the company but is a process which increases share count and decreases market price in the same proportion.

 

Companies choose to engage in a stock split to increase their potential investor demand by lowering the entry barrier of a high priced security and opening up the investor pool. A justification for a reverse-split would be to regain compliance with an exchange for having too low of a share price.