The Necessity of Stock Splits

Stock splits are a process that is commonly used in the stock market today. Here are the basics of how stock splits work and why they are necessary in the market place.

Stock Splits

A stock split is a transaction that is enacted by a particular company in order to change the number of shares of available stock in the market place. Each company that issues stock has a certain number of shares. A stock split can increase or lower that amount of shares available.

For example, let's say that a company has 5000 shares of stock in the market place. They decide to do a 2-for-1 stock split. At that point, it would be like cutting the shares in half, which would actually create 10,000 shares of the stock. This results in a decrease in the stock price, but the value of the company did not change.

This can be done when the price of a stock gets too high in the eyes of the company. They might try to lower the price of a share of stock to entice smaller investors. This can also work in reverse, if a company wants to raise the price of a stock to look more respectable in the industry.

blog comments powered by Disqus
Scottrade