A stock split is when a company divides each of its existing shares into several new ones. In a 10-for-1 split, one share becomes ten, and the price of each share is cut to about a tenth. Nothing about the business changes: the company is not worth more or less, you simply hold more pieces of the same pie, each one smaller. The reverse also exists. In a reverse split (say 1-for-10), ten shares are merged into one and the price per share rises about tenfold, again with no change in the total value. Companies usually do this to bring a very high or very low share price into a more ordinary range.
Worked example
Company A has 1,000,000 shares trading at $100 each, so its market value is 1,000,000 × $100 = $100,000,000. It announces a 10-for-1 split. It now has 1,000,000 × 10 = 10,000,000 shares at about $100 ÷ 10 = $10 each, and the market value is 10,000,000 × $10 = $100,000,000, unchanged. Your 50 shares worth $5,000 become 500 shares worth 500 × $10 = $5,000, also unchanged. Earnings per share (EPS) are divided too: if the company earns $5,000,000 a year, EPS falls from $5,000,000 ÷ 1,000,000 = $5.00 to $5,000,000 ÷ 10,000,000 = $0.50, and a dividend per share shrinks by the same tenth. A 1-for-10 reverse split runs the same sums backwards: 10,000,000 shares at $1 become 1,000,000 shares at $10, and the total stays $10,000,000.
Why it matters
A split matters mostly because it changes the numbers you see on screen, not the business. Per-share figures such as the share price, earnings per share and dividend per share all change by the split ratio, so a chart or a ratio that mixes before and after figures can look like a crash or a jump when nothing happened. Data providers adjust past prices for splits to avoid that, but older printouts and your own notes may not be adjusted. A lower price also makes it easier to buy a single share or a round amount, and some brokers allow fractional shares anyway. Ratios that set the price against a per-share figure, like the price-to-earnings ratio (P/E), stay the same after a split, because price and earnings per share are divided by the same number. Be careful with reverse splits: they are often used by companies whose price has fallen very low, so a reverse split is a question to look into (why did the price get so low?), not a sign of anything good or bad on its own. Check how your broker credits new shares and what it does with leftover fractions.
Frequently asked questions
A stock split divides each share into several new ones. In a 2-for-1 split you get two shares for every one you held, and each is worth about half as much. The company's total value and your total holding value stay the same; only the count and the price per share change.
No, not by itself. If you held 50 shares at $100 ($5,000) and the company splits 10-for-1, you hold 500 shares at about $10, still $5,000. The price afterwards moves for the usual reasons, not because of the split.
A reverse split merges several shares into one: in a 1-for-10 reverse split, ten shares become one and the price per share rises about tenfold. The total value stays the same. Companies use it to lift a very low share price, so it is worth asking why the price got so low.
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