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A stock split lowers the minimum investment needed to buy a stock. We explain how it works and what it means for the value of a stock.
A stock split is a corporate action that divides existing shares, creating more shares but with no increase in total value. For instance, if you buy 100 shares of a $50 stock for $5,000 and the stock is split two-for-one, you will now own 200 shares, each trading for $25, for a total value of $5,000. Stock splits make stocks more affordable by lowering the minimum investment.
A reverse split has the opposite effect, reducing the number of shares you hold but, again, with no change in their total value. For instance, if you own 100 shares of a $0.25 stock, worth $25, the issuer might decide to do a one-for-10 reverse split, leaving you with 10 shares of a $2.50 stock. Reverse splits can make stocks attractive to investors who avoid so-called penny stocks—those trading below $1. Some stock exchanges—for example, the New York Stock Exchange (NYSE)—will delist stocks trading below certain minimum share prices.
Example: “For decades, Berkshire Hathaway CEO Warren Buffett has refused to split the company’s Class A shares, which traded for more than USD$500,000 each in March 2022. While the high price makes the stock unaffordable to many investors, Buffett wishes to discourage short-term traders, preferring long-term shareholders.”
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