A corporate decision to divide a company’s existing shares into multiple shares, and where the total dollar value of the shares remains the equal to their pre-split amounts. This is a financial tool used to boost the liquidity of existing shares while failing to add value to them.
Commonly, 2-for-1 and 3-for-1 stock splits grant shareholders either two or three shares in place of every previously held single share. Therefore, the value of each shareholders stocks does not increase or decrease, but stockholders possess more individual shares as a result.
When a stock split takes place and the number of shares available in the marketplace doubles, triples, etc. the price of each individual share is automatically adjusted. For example, if you owned one share in a company valued at $100, after a 2-for-1 stock split, you would then be in possession of two shares valued at $50 apiece. When stock prices jump too high, stock splits may be used in order to make shares more accessible to additional investors and flexible for existing investors.
Executive One: “I want to encourage the board to support a 100-for-1 stock split.”
Executive Two: “Why is that?”
Executive One: “I want all of our stockholders to be able to hold their multiplied stock certificates above their heads and MAKE IT RAIN!”
Executive Two: “Michael… I think you need a vacation.”