A stock split also often increases the share price after its initial reduction. As the reduced price makes a stock cheaper, more investors are able to purchase it, driving up the demand and, therefore, the price. When companies opt for a stock split, it increases the overall number of outstanding shares and lowers the value of each individual share. But that doesn’t mean the overall valuation of the company changes. Let’s say Stock A trades at $40 and has 10 million shares issued. This gives it a market capitalization of $400 million or $40 x 10 million shares.

• The results of any hypothetical projections can and may differ from actual investment results had the strategies been deployed in actual securities accounts.
• Robo-advisors can build a diversified portfolio of index funds for you based on factors like your age, risk tolerance and time horizon.
• By splitting stocks and cutting the price per share, they’re opening up the opportunity for more potential investors to buy into the company.
• Research suggested that people’s minds are wired to favor round numbers.

The choice of one or the other has little impact on the description of the firm’s financial position provided in the balance sheet. Work with a team of fiduciary advisors who will create a personalized financial plan, match you to expert-built portfolios and provide ongoing advice via video or phone. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail. Companies often like the idea of creating more liquidity by making a price more attractive and attainable for a larger number of people.

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One reason is that a company is getting ready to go public, and its advisors are targeting a specific price point at which the shares should initially sell. This may require that the existing number of shares be reduced or expanded in order to achieve the targeted price. For example, if the estimated market value of a company is expected to be $150 million and the target price is expected to be $15 per share, then there should be 10 million shares outstanding. If there are currently one million shares outstanding, then each share should be split into 10 shares in order to have 10 million shares outstanding. A stock split can make the shares seem more affordable, even though the underlying value of the company has not changed.

Instead, to maintain equity ownership as exclusive, a company may want to intentionally not split its shares. While a split, in theory, should have no effect on a stock’s price, it often results in renewed investor interest, which can have a positive effect on the stock price. While this effect may wane over time, stock splits by blue-chip companies are a bullish signal for investors.

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Certain mutual funds may not invest in stocks priced below a preset minimum per share. A company might also opt for a reverse split to make its stock more appealing to investors who may perceive higher-priced shares as more valuable. A traditional stock split is also known as a forward stock split.

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For example, let’s say you start with 100 shares worth $100 a piece. Assuming no other movement in the stock price, you have $10,000 in stock both before and after the split. Though regular stock splits, also known as forward splits, are a positive indication of the success of a company, a reverse stock split can indicate that a company in trouble.

Advantages and Disadvantages of Reverse Stock Splits

Wall Street media will talk the companies up and get investors thinking, but the truth is, it doesn’t provide direct value. The objective of the stock split is the appearance of a competitive price – even though the share price provides minuscule information about the company. This is the psychological sticker shock that was previously discussed. The other incentive that industry leading companies may be considering is being added to the Dow Jones Industrial Average. Being added to this would likely provide long-term value to shareholders simply for being perceived as a powerhouse in its industry. Thus, being added to the DJIA, it would likely create larger purchases of stock via ETFs, and other funds that are created to track the markets eventually leading to an increase in price.

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Still, it’s a good idea to understand how a split works and how it can impact—or not impact—your investment strategy. The answer to the latter question is “yes, definitely.” The Board of Directors, who are elected by a company’s shareholders, can decide to slice and dice the company into as many pieces as they want. Let’s say Apple (AAPL) decides to do a 4-for-1 stock split as an example. For simplicity’s sake, assume you have one share in Apple’s stock. The company can no longer issue or sell these shares because they’re held by someone or something else. Buying before a split was historically a good strategy due to commissions weighted by the number of shares you bought.

Apple’s going to get the lower share price they want, but they’re also going to bolster the total value of investor equity by taking $30 billion worth of shares out of circulation. Doing them at the same time, while confusing, is still pretty good for anyone who owns Apple. While opening up your stock taxable and tax exempt interest income to investment by a wider swath of the investing community means higher volume and, probably, improving total market value, it can also mean a lot more volatility. The same investors who can be attracted by something like a stock split aren’t likely to stick with a company through tough times.