What Is a Stock Split? How It Works and Why It Matters

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Sometimes, companies want to make their stock more affordable, attractive or accessible to investors without lowering the collective value of their shares. They achieve this through stock splits — or, if they want to increase the price, reverse stock splits. Here’s a look at how stock splits work, and why they matter.

How a Stock Split Works

If a company determines that its stock price is too high, it can lower the value of each share by increasing the number of outstanding shares through an action called a stock split. 

For example, suppose XYZ Corp.’s stock is selling at $1,000 per share. The company thinks that’s too pricey, so the board approves a 2-for-1 stock split. Here’s what happens:

• The company grants each shareholder an additional share for each share they already own.
• The value of each share is cut in half to $500 each since there are now twice as many shares.

The following table shows how that would affect you if you had $100,000 worth of shares.

Types of Stock Splits

There are a few types of stock splits.

• Forward 2-for-1 (2:1): These stock splits are the most common. They occur when a company doubles the number of outstanding shares and lowers stock prices by half.
• Forward 4-for-1 (4:1): This type divides each share into quarters, with each share now worth a quarter of the value of the original. 

Here are some examples of forward splits from the last few years.

A reverse split works in the opposite way, reducing shares and proportionately increasing the price per share.

Reverse Stock Splits and Their Effects

When a stock price gets too low, it can also be a problem for companies. To fix this, they may do a reverse stock split — trading several low-priced shares for one share at a higher price. Common reasons include:

• Boost the share price to comply with stock exchange price minimums
• Entice investors turned off by low share prices to buy stocks

An example of a reverse split occurred in 2003, when Priceline.com, now known as Booking Holdings, went through a 1-to-6 reverse stock split, going from roughly $4 a share to about $25 a share. It seems to have worked out — Booking Holdings closed at $5,548 on Sept. 26.

Key Differences Between Types of Stock Splits

Here’s a side-by-side look at the difference between forward and reverse splits.

Why Do Companies Split Their Stock?

Companies conduct stock splits for a few reasons:

• Make stock more affordable: Lowering the price per share makes it easier for everyday investors to buy in.
• Increase liquidity: More shares on the market mean faster, more efficient trading, which can help reduce risk.
• Boost market perception: Stock splits can generate excitement, media coverage and attract new investors.

Impact on Shareholder Value

Stock splits have no direct effect on shareholder value. Shareholders have the same amount of money invested in the stock after the split as they had before the split. However, the split might have indirect impacts.

• Before the split: Share prices often rise after the announcement, but the boost is usually temporary unless the company’s long-term performance supports it.
• After the split: Prices can climb again because some investors see a split as a sign of the company’s confidence — a “management-signaling effect,” according to Chase.

Stock Split vs. Stock Dividend

From the perspective of an individual shareholder, a stock dividend is very similar to a stock split. In fact, the only real difference is in how it is accounted for on a company’s books.

Here’s how stock splits and stock dividends compare.

The Impact of Stock Splits on Shareholders

A company’s value on the stock market is determined by its market capitalization. This metric represents the combined value of all the company’s shares. Although a stock split changes both the price and the number of a company’s shares, the combined value of those shares — the company’s market cap — always remains the same.

A stock split often means the company’s share price has grown so much that it has become too expensive for many investors. When the split makes shares more affordable, new investors are eager to buy in.

While a stock split technically doesn’t add or remove value, it can be good for the company and the shareholder who couldn’t have afforded a share otherwise. 

It’s common for news of a stock split to trigger rapid gains. Kiplinger points to three main reasons why:

• Lower prices attract more buyers: Splits open the door to investors who were previously priced out, boosting demand — and prices.
• Confidence in continued growth: Investors often see a split as a sign that the company’s strong performance will continue. 
• Signal to big investors: Companies sometimes use splits to show deep-pocketed investors that they have untapped growth potential, leading to large purchases in a short period.

Despite these benefits, not all companies split their stock. Growth companies often see rising share prices as proof of success and prefer to let them keep climbing.

Examples of Notable Stock Splits

When it comes to stock splits, some companies go really big, flooding the market with cheap shares.

Amazon split its shares 20:1 in 2022, as did Alphabet. Both had had previous splits. Shopify enacted a 10:1 split that same year.

Here are a couple of other stock splits that attracted a lot of attention.

Apple

In 2014, Apple split its stock 7-for-1 to bring the price from about $140 a share to about $20 a share. Six years later, the stock split again, this time at a 4-to-1 ratio. In all, Apple has split its stock five times in its history.

Tesla

In 2020, Tesla split its stock 5-to-1. This cut the electric car maker’s share price from about $2,250 per share to about $450 per share. It had more than doubled by the August 2022 3:1 split.

Historical Stock Split Timeline

• 1987: Apple splits 2:1
• 1998: Amazon splits 2:1
• 1999: Amazon splits 3:1 in January and 2:1 in September
• 2000: Apple splits 2:1
• 2005: Apple splits 2:1
• 2014: Apple splits 7:1, Alphabet splits 2:1
• 2020: Tesla splits 5:1, Apple splits 4:1
• 2022: Amazon splits 20:1, Alphabet splits 20:1, Shopify splits 10:1, Tesla splits 3:1

Stock Split Risks and Considerations

A stock split is neither good nor bad. It is a purely cosmetic corporate undertaking that does not impact the value of the stock, either to the company or to shareholders — at least on paper. But it can have positive and negative indirect effects.

Pros

• Pre-split boost: Share prices often rise after a forward split is announced, though the gain is usually priced in by the split date.
• Post-split bump: Prices can climb again after the split.
• Exchange compliance: Reverse splits can help companies meet minimum share price requirements to avoid delisting.
• Investor attention: Splits may attract analysts and major investors.
• More buyers: Lower share prices can encourage more people to invest.

Cons

• Financial trouble signal: Reverse stock splits often indicate a company may be struggling.
• Short-lived gains: Split-related price increases rarely last unless the company’s fundamentals support them.

What the Experts Say

MorningStar’s 2024 analysis looked at S&P 500 stocks that had split within the past one to 10 years. It then compared the one-year post-split returns of 54 such stocks to the overall S&P 500’s returns.

Here’s how the share prices fared:

• 18 increased by 0.1% to 20%
• 16 increased by 21% or more
• 12 decreased by 0.1% to 15%
• 8 decreased by 15% or more

Failing to identify a trend, MorningStar concluded that stock splits are “just cosmetic.”

“A split does not change the economic value of a company; it only changes the proportionate amount of ownership each share represents,” said Morningstar chief U.S. market strategist Dave Sekera.

Final Take

While splits don’t make companies more valuable, they do represent a window of opportunity for budget-minded investors whose brokerages don’t support fractional-share investing.

Want to make the most of a stock split? Follow these steps to find opportunities and invest wisely.

Andrew Lisa and Karen Doyle contributed to the reporting for this article.

Information is accurate as of Sept. 29, 2025.

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