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A split is the division of a single share of stock into two or more shares, with a total combined value equal to the value of the pre-split share. For example, let's say Company XYZ declares a 2-for-1 split, and you own 100 shares which are selling at $100 a share. After the split, you would have 200 shares priced at $50 per share. A company might decide to split its stock if the market price is higher than average and the company fears that investors will be reluctant to buy at that price.
Why does this matter?
Because a stock split may make the stock more affordable. That, in turn, may cause more investors to decide to purchase shares, which can be helpful to some investors and to a company looking to expand its base of shareholders. But when you get right down to it, a split does not change the value of a company, any more than cutting a pizza into slices changes the pizza pie.
Splits can have a reverse gear.
In a reverse split you might receive one new share for every five old shares. If the price-per-share had been $1, each new share would be worth $5—but as a shareholder, you'll end up with one fifth the number of original shares you purchased. Companies may do reverse splits to maintain their listing on a stock market that has a minimum per-share price, or to appeal to certain institutional investors who may not buy stock priced below a certain amount. In either of those cases—indeed if reverse splits are announced or actually occur—you'll want to proceed with caution. Reverse splitting tends to go hand in hand with low-priced, high-risk stocks.
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