Ask a Fool: What does a stock split mean?

Ask a Fool: What does a stock split mean?

Traders work on the floor of the New York Stock Exchange at the closing bell of the Dow Industrial Average May 17.


 
 
Q: One of my stocks just announced a split. Will my investment be worth twice as much?

A stock split doesn't increase the value of your investment — at least not directly. For example, if you own 100 shares of a stock that trades for $80 and it splits 2-for-1, you'll own 200 shares with a value of $40 each after the split is completed. The total value of your investment is still $8,000.

Having said that, the primary motivation for a company to split its stock in most circumstances is to maintain a share price in a certain range, which helps keep the stock affordable to smaller investors and allows people to invest more of their money.

Let's say that you have $1,500 to invest and want to buy shares of Amazon.com, which costs about $968 per share as I write this. At the current share price, you could  afford to buy only a single share, leaving $532 of your money uninvested.

On the other hand, if Amazon were to split its shares 10-for-1, its share price would drop to $96.80, and each share would represent one-tenth of the equity that it currently does. Your $1,500 can buy 15 shares, which would leave just $48 of your money on the sidelines. I don't think Amazon will necessarily split its stock anytime soon, but if it did, it would allow smaller investors to put more of their money into the company. This can (and often does) create buying pressure on a stock after it splits and cause the price to rise as investors can put more of their money into the stock.

The bottom line is that although the split won't technically give you more equity in the company, a stock split can result in a boost in the share price.

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