Split in Half

• A banana split is served with a banana that is usually cut in half down the middle. A 2-for-1 stock split cuts the value of a stock in half. By giving every stockholder two stocks for every one he owns, the company can double the number of shares an investor holds, while keeping the total market value of the stock the same. A stock split implies the stock is being split in half; in reality one stock is becoming two or more stocks. In the 2-for-1 stock split, the investor receives two new stocks for every one he owned.
  
  

Example

• As a 2-for-1 stock split creates two stocks for every one stock owned, it also splits the value of the stock. For instance, if the value of the stock is $10 per share before the stock split, after a 2-for-1 stock split each share of stock will be worth $5, but the investor owns two shares of stock instead of one. Net/net, the value of the stock does not change.
  
  

Affordability

• While stock splits do not result in a change in the total market value of stock outstanding by the company, they do result in a lower stock price per share. Lowering the price of the stock also increases the number of people that can afford to purchase the stock. A $100 stock may seem less attractive to someone looking for $50 stocks, regardless of value; she can invest for a smaller amount and still receive a proportional value of the company. In addition to making the stock available to people at a lower price point, it may also increase the popularity or demand for the stock which will, in turn, increase the stock price.
  
  

Reverse Stock Split

• Another common stock split is called the reverse stock split. This is when many stocks are merged into one. For instance, a 1-for-2 reverse stock split implies that two stocks will become one stock. This also means that the value of the stock will double. So if the stock is valued at $5 per share before the reverse stock split, it is worth $10 per share after the split because two shares are turned into one.