What is a stock split?
When a company splits its stock, it takes each share and divides it into some larger number of shares. It can be a 2-for-1 stock split or any other combination. When the stock is split, more shares are available, but the total value of all the shares remains the same. Accordingly, if you owned one share worth $100, and the issuing company conducted a 2-for-1 stock split, you would own two shares worth $50 each. Companies can also do reverse splits, making one share from numerous shares, if they want to increase the per-share price of the stock.
Stock splits are typically done when the price of individual shares has risen to a level that the company feels is higher than optimal. More affordable share prices are thought to increase liquidity, or the ease with which shares are bought and sold. Companies also split their stock to show the confidence of management in the future performance of the stock and to attract attention to the stock if it has been languishing. Although studies have been conducted on whether stocks that split perform better than those that don't, evidence suggests that splits make little difference in stock performance over the long term.
A common misconception about stock splits is that they automatically increase the value of your holdings. In fact, because the value of shares is adjusted in proportion to the change in share value, the total value of your holdings remains the same.