Stock splits are common occurrences in the world of investing, and are an important topic when it comes to SIE exam prep. But what exactly is a stock split? Simply put, a stock split is when a company’s per-share price is divided into multiple shares. For example, if you own one share of XYZ Corporation at $100 per share and the company announces a 2-for-1 stock split, you would then own two shares of XYZ Corporation, each worth $50 per share.
There are different types of stock splits that a company can declare. The most common type is the regular split, which is usually a 2-for-1 or 3-for-2 split. This means that for every one share you own, you would receive two or three shares, respectively. A reverse split is less common, and it’s when a company’s per-share price is increased by reducing the number of shares outstanding. For example, if you own one share of XYZ Corporation at $100 per share and the company declares a 1-for-2 reverse split, you would then own one-half of a share of XYZ Corporation, worth $200 per share.
The purpose of a stock split is to make the shares more affordable for investors. When a company’s stock price gets too high, it might become less attractive to potential investors. By splitting the shares, the price per share becomes more manageable, which could entice more investors to buy the stock.
Stock splits don’t typically have a major impact on the underlying value of a company. However, they can be a good indicator that management believes the stock is undervalued and has room to grow. If you’re considering investing in a company that has declared a stock split, it’s important to do your own research to make sure the stock is a good fit for your portfolio.
Have you ever seen a company’s stock price split? Do you think stock splits are a good indicator of a company’s future growth potential?
