What Is A Stock Split?

What is a stock split and what does it mean for you?

Stock splits happen from time to time, so it’s important for us as investors to understand what they mean and how they might impact our investing decisions. 

Consider this a crash course to stock splits. Let’s begin.

Stock Splits Can be Deceiving

Say you are interested in investing in a company and you are waiting for its price to drop to your “buy price” so you can get a great return on your investment. One day, you wake up and see that the price of that company’s stock is half of what it was before. So, you pull the trigger and BUY!

Sound familiar? Well, this is NOT a smart move.

When a company decides to undergo a stock split, its stock price very well could be for sale one day at half of what it was the day before.

If you’re not paying close attention, you may not realize that it is just as expensive—if not more—than it was before the stock split and buy at the wrong price. In reality, the new lower price of a company’s stock after it undergoes a stock split has nothing to do with its true value.

what is a stock split

What Is A Stock Split? 

A stock split is when a company decides to exchange more shares of its stock at a lower price for stockholders’ existing shares. 

So, what happens to a stock’s price when it splits?  

Nothing actually, although, it’s going to look like something big happened. Stock splits don’t change the market cap, which is the market price of the stock on a given day multiplied by all of the shares, or the sticker price of a stock one single cent. Not a penny. All a stock split does is change the number of shares and the price per share. I repeat: this does not change the total value of all those shares by even one cent.

Think of it this way: if you had a pizza originally cut up into 4 pieces, now cut up into 8 pieces, the actual value of the pizza doesn’t change. 

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