“Stock splitting” is when a company decides to do just that—break a stock into additional shares. Imagine you have a bar of chocolate and want to break it into squares; the concept is the same for stocks.
Public companies have a maximum number of shares that can be sold to shareholders. A stock split increases the number of shares on the market by splitting the current outstanding shares into more shares. This will reduce the value of each share according to its ratio.
In a basic 2 for 1 split, each share will be worth 50% of the original, single share’s value. But shareholders don’t necessarily see their investment dilute, or lose value – two shares is still equal to 1 of the previous shares. The value is the same, they are just split up into multiple, lower value shares.
In a reverse stock split, each share is converted to a fraction of a share. For example, if you own 2 shares, and a reverse stock split occurs that converts each share into 0.5 shares, your 2 shares become 1.
The result is fewer, but higher-value shares. A company may want to up the value of its shares to boost its image, or in some cases, to avoid being delisted from stock exchanges if their current share price is too low.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.