investing guide

How Do Stock Splits Work

stock splits

So how do stock splits work?

Stock splits come in many varieties, but we will keep it simple and just give you an explanation of a basic 2-for-1 stock split.

When you hear of a corporation announcing a 2-for-1 stock split all it means is the corporation is basically cutting the price of the stock in half. The main reason for doing this is to attract more investors who may feel the price of a stock is currently just to expensive for them.

As an example if you owned 100 shares of a corporation at $50.00 a share and the stock splits you now own 200 shares that cost $25.00 a share. The value of your $5000.00 investment remains the same after the split. So in essence it really does not effect your investment if a stock splits that you own. However, a new investor may be more willing to pay $25.00 a share as opposed to $50.00 a share.