Stock Split

A stock split is one of  corporate actions that happens when a company changes the amounts of shares and adjusts the share’s price accordingly. A stock split  increases or decreases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur.

For example, a company with 100 shares of stock priced at $20 per share. The market capitalization is 50 × $20, or $1000. The company splits its stock 2-for-1. There are now 100 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $10. The market capitalization is 100 × $10 = $1000, the same as before the split.

Stock splits are usually non-taxable. It is important to note that after a stock split, the number of shares you own in the security and the cost basis of those shares will change. Often stock splits are expressed as a fraction.  A two-for-one stock split is the most common – the investor receives one additional share for every share owned in the security.