Even if you’re new to investing in the stock market, you’re probably heard of the term “stock split”, however many new investors are unsure of what the term exactly means, when it happens or how it will impact your investment. Stock splits are a regular occurrence on the exhanges and many investors revel in catching a split because more often than not it means that the future for the particular stock in question will be bright. Many of the most popular stocks have been through splits time and again. Notable stocks that have split are Microsoft, AOL, Oracle, Yahoo and many others.

What is a Stock Split?

A stock split generally occurs when a corporation decides to make more shares of their stock available to shareholders. This is a decision made by the company’s board of directors who often decide split their stock when they believe the current price of their stock exceeds the amount smaller individual investors would be willing to pay for the stock. For example, if a companies stock is currently trading at $100 a share and they would like to make it available to investors at $50 a share, they will do a 2 for 1 split which means that for every share an investor is holding at $100 per share, they will be given two shares at $50 each. There is no loss of value to the individual investor, however a split will generally entice more investors to purchase the cheaper priced stock, thus increasing it’s value in the long run. While a 2 for 1 split is the most common, companies also distribute 3 for 1 splits, 3 for 2 splits, 5 for 1 splits, etc.

What is a Reverse Split?

Sometimes a company will issue what is known as a reverse split. When this happens the shareholder will have less shares at a greater value. For example, the most common type of reverse split is a 1 for 10 split. In this case, if a company has been trading at $1 a share and you have 100 shares, after a 1 for 10 split you will now have 10 shares at $10 per share. The conditions leading up to a company performing a reverse split is usually precipitated by a share price drop to a very low level and the company wants to increase the share price to appear more viable to potential investors. Additionally, if a share price drops below a certain point some exchanges will de-list a stock for 30 days which could have a crippling effect on the company’s future.