When the price of a company stock reaches such a high level that it is no longer attractive to many investors, the company may decide to increase the number of shares of stock in order to lower the value of each share of stock. Stock splits may be in any proportion: 2 for 1, 3 for 2, or 3 for 1, etc.

Example: A company has issued 2,000,000 shares of stock. The value of each share has reached $100 per share. Since the price is high, investors can not afford to buy very many shares of stock in this company. The company decides to split the value of these stocks 2 for 1. There are now 4,000,000 shares of stock, each share is now worth $50. Stock holders that had owned one share of stock worth $100, now have 2 shares of stock worth $50 each. The lower stock price may attract more investors, increasing the demand for the stock, thereby increasing the price of the stock. Eventually the split will result in a better return for the stock holder.

When the news of a potential stock split is made public, this generally increases the price of the stock that is going to split. In other words, if you hear that a stock is going to split, it is generally good ot buy it!
 
 

Last updated July 21, 1999
by Megan McCarthy