What is Stock Split?

In a 2-for-1 stock split, every shareholder receives an additional share for each share they own, and the stock price is halved. An investor with 100 shares at $200 would have 200 shares at $100 after the split. The total value remains $20,000. Common split ratios include 2:1, 3:1, 4:1, and occasionally larger ratios like 10:1 or 20:1.

While stock splits are mathematically neutral (no value is created or destroyed), they often generate positive stock price reactions. Studies show stocks that announce splits outperform the market by 2-5% around the announcement. This is partly because splits are often accompanied by confidence from management and signal strong prior performance.

Notable recent splits include Apple's 4:1 split in 2020 (from ~$500 to ~$125), Tesla's 5:1 split in 2020 (from ~$2,250 to ~$450), and Amazon's 20:1 split in 2022 (from ~$2,785 to ~$139). These splits made the stocks more accessible to retail investors and eligible for inclusion in price-weighted indices like the Dow Jones.

Reverse stock splits reduce the number of shares and increase the price proportionally. A 1-for-10 reverse split turns 100 shares at $1 into 10 shares at $10. Reverse splits are typically viewed negatively as they are often done to maintain exchange listing requirements (minimum price thresholds) and are associated with struggling companies.