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What is a Stock Split?

Stock Split - A stock split or stock divide increases the number of shares in a company. For example, after a 2-for-1 split, each investor will own double the number of shares, and each share will be worth half as much. A stock split causes a decrease of market price of individual shares but does not change the total market capitalization of the company.

Key Takeaways:

  • Stock splits are a process whereby a company increases the quantity of shares to reduce their prices, making them more accessible to retail investors.

  • The publicly traded companies decide on splitting stocks in consultation with the board of directors.

  • Forward and reverse splits are two broadly classified categories of stock splits.

  • When companies split stocks, it indicates their positive growth and progress, leading to decreased share prices building an investor base as shares become more accessible.

Primarily, companies announce a split when a long run-up is observed in their share prices. The share splits, as the process is also known, reduce the share price to make it affordable for retail investors. This, in turn, increases the investor base of the firms. Furthermore, the investors’ trust in the company impacts the share prices positively, and the increase in the quantity of shares leads to their improved liquidity. This enhancement in liquidity makes the market more efficient

There are two types of splits?

  • Forward Splits

  • Reverse Splits

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