What is a Stock Split?

A stock split is a corporate action that increases the total number of a company’s shares by a specific multiple (number) while reducing the price per share by that same multiple.

Take a look at a Pizza Analogy to help understand the stock split:

  1. Imagine a single pizza cut into 4 equal slices.
  2. Imagine that each of the 4 slices is owned by 4 separate persons.
  3. The pizza is then further sliced such that everyone who had 1 slice now has 2 slices.

Note:

  • The size of the whole pizza did not change.
  • The number of persons who own pizza slices did not change.
  • The portion of the whole pizza that each person has did not change.
  • Therefore, the only change is the number of slices each person owns.

 

Similar to the pizza analogy, in a stock split, the size of the whole company (whole pizza) does not change. The value of each shareholder’s total shareholdings (the portion of the whole pizza that each person has) does not change. Mathematically, to ensure the value of the total shares owned does not change, the price of each share is reduced as the quantity of shares increases.