A stock split is a corporate action in which a company increases the number of its outstanding shares by issuing more shares to current shareholders. The most common split ratios are 2-for-1 or 3-for-1, which means every single share before the split will turn into multiple shares after the split. For example, in a 2-for-1 split, each investor will own double the number of shares, and each share will be worth half as much. The total dollar value of all shares outstanding remains the same because a split does not fundamentally change the companys value. The market capitalization is the same before and after the split.

A company may split its stock when the market price per share is so high that it becomes unwieldy when traded. One of the reasons is that a very high share price may deter small investors from buying the shares. A stock split is used primarily by companies that have seen their share prices increase substantially. The main effect of stock splits is an increase in the liquidity of a stock: there are more buyers and sellers for 10 shares at $10 than 1 share at $100.

Stock splits can improve trading liquidity and make the stock seem more affordable. A stock split gets issued by a company’s board of directors in an effort to become more affordable to potential investors. The announcement tends to come a few weeks before the stock split goes into effect so current investors aren’t caught off guard and potential investors can make plans to buy shares.

In summary, a stock split is a corporate action in which a company increases the number of its outstanding shares by issuing more shares to current shareholders. The most common split ratios are 2-for-1 or 3-for-1, which means every single share before the split will turn into multiple shares after the split. The total dollar value of all shares outstanding remains the same because a split does not fundamentally change the companys value. Companies may split their stock to make it more affordable to potential investors and to improve trading liquidity.