Stock Splits

When a stock price gets very high, companies may decide to split the stock to bring its price down. One reason to do this is that a very high stock price can intimidate investors who fear there is little room for growth, or what is known as price appreciation.

Here's how a stock split works: Suppose a stock trading at $150 a share is split 3-for-1. If you owned 100 shares worth $15,000 before the split, you would hold 300 shares valued at $50 each after the split, so that your investment would still be worth $15,000. More investors may become interested in the stock at the lower price, so there's always the possibility that your newly split shares will rise again in price due to increased demand. In fact, it may move back toward the pre-split price—though, of course, there's no guarantee that it will.

You may also own stock that goes through a reverse split, though this type of split is less common especially among seasoned companies that trade on one of the major U.S. stock markets. In this case, a company with very low-priced stock reduces the total number of shares to increase the per-share price.

For example, 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. 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 splits tend to go hand in hand with low priced, high risk stocks.