Series 65: 2.1.1.3.1. Stock Splits

2.1.1.3.1. Stock Splits

If a company believes that the price of its stock has risen too high for the individual investors, the company may execute a stock split. Most companies want a broad shareholder base, so it’s in their best interest to keep their stock price within reach of most investors. The most common stock split is a 2-for-1 split, but 3-for-1 and 3-for-2 are also common, and any ratio is permitted.

When a stock split occurs, the value of each shareholder’s interest remains the same, as does the market capitalization of the company. What changes is the number of shares outstanding and the price of each share. In the case of a 2-for-1 stock split, the number of shares doubles and the share price is cut in half. To calculate this, multiply the number of shares by the split ratio of two and divide the share price by the same ratio. In the case of a 3-for-2 split, the number of shares increases by 50% and the share price drops to two-thirds of what it was before the split. To calculate this, multiply the number of shares by the split ratio (3/2 or 1.5) and divide the share price