Definition
A stock split increases the number of a company's shares by dividing each existing share into several, lowering the price per share in the same proportion without changing the company's total value.
How it works
In a 4-for-1 split, each share becomes 4 shares, and the price per share falls to about one quarter, so the total value of each holding stays the same. The company's market cap and each shareholder's ownership percentage do not change. Companies often split after a long price rise to lower the price of a single share.
A reverse split works the other way: in a 1-for-10 reverse split, every 10 shares become 1 share at about 10 times the price. Companies sometimes use it to lift a very low share price, for example to meet an exchange's minimum price rule. Leftover fractions of a share may be paid out in cash, depending on the company and the broker.
After a split, per-share figures are adjusted so they stay comparable. EPS, dividends per share and historical prices on charts are divided by the split ratio, while ratios such as P/E and dividend yield are unchanged. A split alone does not change the company's earnings, assets or value.
Example (hypothetical numbers)
Suppose you own 50 shares of Company X at $400, worth 50 × $400 = $20,000, and the company does a 4-for-1 split.
After the split you own 50 × 4 = 200 shares at about $400 ÷ 4 = $100, still worth 200 × $100 = $20,000.
EPS of $8 becomes $8 ÷ 4 = $2, and an annual dividend of $4 per share becomes $1.
The P/E is $400 ÷ $8 = 50 before and $100 ÷ $2 = 50 after, and the dividend yield stays at 1%.
The split changed the per-share numbers, not the value of the holding or of the company.
Common mistakes
- Believing a stock became cheaper in valuation terms because its price per share fell after a split.
- Comparing pre-split and post-split prices without adjusting for the split ratio.
- Forgetting that EPS and dividends per share are also divided by the split ratio.
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.