What is a Stock Split? And Why Do Companies Split Their Shares?

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What does it mean when a company decides to do a stock split?

For the company and existing shareholders, it actually doesn't change that much. Stock splits change the number of ways ownership is sliced, but they don't change the value of a company or the value an individual holds.

That's because when a company announces a stock split, they give existing shareholders stock as a dividend to make them whole for the increase in share count.

If it doesn't change anything in terms of value, why do companies split their stock?

Stock splits reduce the price per share, making it easier for new investors to become a shareholder of the company. This is partially why Apple split its stock 7-for-1 in 2014.

Splits also increase the number of shares outstanding, which can help with liquidity.

Some special securities like options are sold in blocks of 100 shares, so if a company’s stock price is very high, it requires a lot of money upfront to create these transactions.

Really, stock splits are simply cosmetic changes to how ownership of a company is held, which is why fewer companies are doing them. It's best to think of a stock split like your share of a pizza pie -- you can have one slice of a pizza that's been cut four ways, or two slices of the same pizza that's been cut eight ways. Either way, you're getting the same amount of pizza.


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