What Is a Stock Split? Forward and Reverse Splits Explained

A stock split changes how many shares a company has and the price of each share, without changing the total value of the company or of your investment. It's like cutting a pizza into more slices: you have more pieces, but the same amount of pizza.

Forward splits

In a 2-for-1 split, every share you own becomes two shares, and the share price is cut in half. If you owned 10 shares at $400 ($4,000 total), you'd own 20 shares at $200, still $4,000. Other common ratios include 3-for-1, 4-for-1 and 10-for-1.

Why companies split their stock

• Lower share price: a lower price can make the stock feel more accessible to individual investors and employees, though fractional shares have made this matter less.
• More trading: more shares at a lower price can improve trading activity.
• A signal of confidence: companies usually split after a long run of share price gains, and investors often read a split as a sign management expects the strength to continue.

A split doesn't change the company's earnings, cash flow or market cap, so it doesn't make the stock cheaper in any real sense. Valuation measures such as the P/E ratio are unchanged, because earnings per share is divided by the same ratio as the price.

Reverse splits

A reverse split combines shares. In a 1-for-10 reverse split, every 10 shares become one, and the price rises tenfold. Companies usually do this to lift a very low share price, often to stay above an exchange's minimum price requirement. Reverse splits are frequently a sign of a struggling company, though not always.

What happens to your account

• Your broker adjusts your share count and cost basis per share automatically. Your total cost basis stays the same.
• In a reverse split, fractional leftover shares are usually paid out in cash.
• A split is not a taxable event in itself. See capital gains tax on stocks.
• Price charts are adjusted for past splits, so historical prices on StockEngine stock pages are comparable to today's.

This article is educational and not investment advice.