What Are Stock Splits and Reverse Stock Splits

Stock Split and Reverse Stock Split are two methods companies use to adjust the number of their shares and the par value per share.

Stock Split

A stock split refers to a company dividing its existing shares into a larger number of shares according to a certain ratio. After a stock split, the total number of shares increases, but the par value and price per share decrease, while the total market capitalization remains unchanged. Stock splits are usually carried out when the stock price is relatively high, to lower the price and make it more attractive, especially to retail investors.

Example:

• If a company performs a 2-for-1 stock split, it means each share is split into two shares. If the original stock price was $100, after the split, the price per share will drop to $50, but the number of shares held will double.

Reverse Stock Split

A reverse stock split is the opposite operation, where a company consolidates its existing shares into fewer shares according to a certain ratio. After a reverse split, the total number of shares decreases, but the par value and price per share increase, while the total market capitalization remains unchanged. Reverse splits are usually done when the stock price is too low, to raise the price, avoid delisting by exchanges, or attract larger investors.

Example:

• If a company performs a 1-for-2 reverse stock split, it means every two shares are combined into one share. If the original stock price was $50, after the reverse split, the price per share will rise to $100, but the number of shares held will be halved.

Both stock splits and reverse stock splits adjust the number of shares to change the price per share without altering the company's total market value. These actions are typically strategic, such as enhancing stock liquidity or increasing the stock price to meet market or regulatory requirements.