Stock Split

When a publicly traded corporation seeks to increase the number of shares in the company the action is referred to as a "stock split." The per share price is adjusted so that the market capitalization remains the same without any dilution occurring.

As an example, consider a company with 200 shares of stock at $100 a share. By taking 200 shares multiplied by a price of $100 the market capitalization for the firm would be $20,000. If the company chooses to split its stock "2 for 1," there would now be 400 shares of stock at an adjusted price of $50. Four hundred shares multiplied by $50 still returns a market capitalization of $20,000 but each stockholder would own double their previous amount of shares.

Routinely stock splits occur at ratios of 2 for 1, 3 for 1, and 3 for 2. Other splits that are used but are less common include 4 for 3, 5 for 2, and 4 for 4.

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