All about Stock Splits vs Reverse Splits

Stock Splits vs Reverse Splits: Keeping it Simple!

Imagine a company's value is like a giant pizza. Stock splits and reverse splits are ways they can change the number of slices (shares) without affecting the total pizza size (company value).

 

Stock Split: More Slices, Same Pizza

A company increases the number of shares available.

Think of cutting the pizza into more slices.

Each slice (share) becomes cheaper, but you still have the same amount of pizza (company value).

Why Do Companies Do This?

Make shares more affordable, attracting new investors.

Increase trading activity, making the stock easier to buy and sell.

What Happens to Your Investment?

If you own 10 shares, a 2-for-1 split gives you 20 shares (double the slices!).

The price per share gets cut in half (each slice is worth less) to keep the total value the same.

Reverse Split: Fewer Slices, Same Pizza

A company reduces the number of shares available.

Think of merging smaller slices into bigger ones.

You have fewer slices (shares), but each slice is worth more.

Why Do Companies Do This?

Meet stock exchange requirements (some require a minimum share price).

Improve investor perception (a higher price can seem more attractive).

What Happens to Your Investment?

If you own 10 shares, a 1-for-5 reverse split gives you 2 shares (fewer slices).

The price per share increases fivefold (each slice is worth more) to keep the total value the same.

The Key Takeaway:

Stock splits and reverse splits don't change the company's value, they just adjust the number of shares and their price.