What is a stock split? What does it mean for my stock price?

Definition of stock split:
When a stock is split in two, thus the stock price decreases, but the number of shares increases proportionately.

Now this does not mean that if the market takes a downward turn, and your stock prices drop that you have had a stock split. With a stock split the value of your stock remains intact.

For example, if you own 600 shares of a company that trades at $90 a share and the company declares a three for one stock split, you will own a total of 1800 shares at $30 a share after the split. So, the total value (number of shares time price per share) remains the same.

A stock that has split in the last 52 weeks will be identified in newspaper stock columns with an "S" next to the company's name.

A stock split has no effect on the value of what shareholders own. This is true for dividends paid out as well, as these too will be divided proportionately.

So, if it has no effect on value.why would a company want to split their stock?
There are a few reasons:
1. Companies generally will split their stock when they believe the price of their stock exceeds the amount smaller investors would be willing to pay for the stock. So, to attract small, individual, investors.
2. This is pretty much the same things as number one, but it is to make their stock affordable to investors at every level.
3. To try and induce change in their current stock trade.

We will get into these more as we talk about what effect on price splitting stock has.

It is important to note that stocks can be split any way or in other words in any ratio. Most common is a two to one, but three for one, three for two, and so forth are fine, as long as the split is proportionate it does not really matter. Sometimes stock splits are referred to in percents. A 2:1 split is a 100% stock split; a 50% split would be a 3:2 split.

Now, let's get a little more into how this affects the price, other than the proportionate split in price, what happens? While theoretically a stock split is a non-event, as the total value, or fraction of the company owned (which is represented by the stocks) stays the same, the desired result is an increase in price.

Let's look at it this way, ordinarily a stock split will drive the new price per share up, as more of the public is attracted by the lower price, and buy the stock.

However, from there, the price tends to level off, as the goal of a stock split is generally to attract individual investors, not institutional ones. Institutional investors buy and sell more often than individuals, so making your stock attractive to individuals, makes it more stable.

So, in answer to what does a stock split do to the price, initially it lowers it, although for the current stockholders this is not a big deal as they have proportionately more shares. Then the price rises, which is caused by individual investors finding the stock more attractively priced, and thus in their price range. This is celebrated by pre-split shareholders. Then the price tends to level off, and the stock becomes fairly stable. While this is not true for every stock out there, it does hold true as a generality. So, stock splits are non-events that open up a way for individuals to be able to invest in that particular company, the value of the stocks change very little overall.