Stock Splits Explained

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⬇️Timestamps:
0:00 → Intro
1:24 → What is a stock split?
3:15 → Why split - (1) Liquidity
4:30 → Why split - (2) Psychological factors
6:25 → Why split - (3) DJIA inclusion
7:59 → How does a stock split affect you?
9:25 → Conclusion

A stock split is when a company’s board of directors issues more shares of stock to its current shareholders without diluting the value of their stakes. A stock split increases the number of shares outstanding and lowers the individual value of each share. While the number of shares outstanding change, the overall market capitalization of the company and the value of each shareholder’s stake remains the same.

Say you have one share of a company’s stock. If the company opts for a 2-for-1 stock split, the company would grant you an additional share, but each share would be valued at half the amount of the original. After the split, your two shares would be worth the same as the one share you started with.

As fractional investing becomes more popular and widespread, some experts speculate that stock splits will become less important as fractional shares allow you to buy into a company at virtually any price point. But, that’s not even considering the psychological aspect of stock splits because humans love a round number as opposed to fractions, and there’s something about knowing you have the money to buy a full share that motivates many investors.

It’s tempting to want to buy into a pricey stock when it becomes much cheaper to do so; however, eager investors should make sure that stock aligns with their overall investing goals. You shouldn’t jump all in just to say you own Amazon stock, for example, unless it’s something that has long been a part of your portfolio objectives.

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